The Scene
Asset-manager names come in a few well-worn flavors. There are your “color plus water features”. There are your Connecticut landmarks, your Atlantics and Pacifics. There are founder initials. There are the Greek gods. (I once pitched a story at The Wall Street Journal about how hard it was to name a hedge fund because all the mythological creatures had been taken, only to find out The Wall Street Journal had already written the same story 10 years earlier.)
And then there are anodyne descriptors that, more often than not, are masking a discipline, have a distinct lack of showiness, and serious profits. Today I talk to Victor Khosla, founder and chief investment officer of Strategic Value Partners, which has $18 billion under management and a go-anywhere strategy. This market is built for firms like his, and a handful of competitors like Sixth Street, that are agnostic to where, how, and in what they invest.
SVP does mostly structured loans, investing about 60% of its money in the US and 40% in Europe. It has about 90 investment professionals and there are 100,000 employees at 15 companies it controls — 10 of which it wrested through bankruptcy in a classic elbows-out debt playbook and five of which it got by simply buying the equity. Its deals “don’t pop up on Bloomberg terminals,” Khosla tells me.
We talked about “toasty” equity and make-believe marks and ducks. That conversation, edited and condensed, is below.
The View From Victor Khosla
Rates went from zero to five and the S&P is somehow at 5,000. Everyone keeps talking about a looming wave of maturities and defaults, but we haven’t yet seen it. Does any of this make sense to you?
It befuddles me. I look at an $8 trillion commercial mortgage market, $2 trillion of that is office mortgage debt in the US and Europe. If you look at the public REITs, office property values have fallen 40%. A lot of people in the private markets have it marked 70%. So what does that mean? Is my equity toast? Yeah, it’s sort of toasty.
The equity markets are strong. But our pipeline has quadrupled over the last two years. I’ve been doing this for 30 odd years, and I’ve never seen those two things together. Picture a duck gliding across a pond that looks kind of serene. And underneath, you don’t see feathers coming off them.
What’s your assessment of the intellectual honesty of those marks?
Everyone believes. [Laughs.] I don’t know how else to say it. You can have a belief that, hey, I don’t have a capital structure that has some maturity, I can see my way through this down cycle. But the real estate down cycle is protracted. It’s not one year, two years and you touch the bottom and hit back up.
And there’s more volatility coming. If there’s a change in administration, and things get a lot tougher with China, if we erect a few more barriers, even versus our allies in Europe. Right now, people are just seeing through it. I don’t think it’s doom. It’s a slog. It’s a slog here, and it’s a real slog in Europe.
That would seem to be good for a go-anywhere business like yours.
We didn’t go out and create an airplane fund, because we think airplanes are really great to invest in two or three years out of ten. We’ve got one of the strongest European investment businesses of anybody in our industry, and we’ve had chances over time to create an European-only fund, but the European business is more cyclical and we don’t want to be compelled to invest.
But there’s a tradeoff there, right? It’s easier to market a new fund as Europe-only or aircraft financing and raise assets. It’s harder to say we’re just going to do whatever we want and trust us.
It may be less commercial. But when you can really perform, your carry dwarfs what you make in management fees.
Is this your way of saying you have no plans to go public?
We are not going to be publicly traded. We grind. There’s no Florida living here.
Where’s the opportunity today?
The opportunity set isn’t like, ‘Oh, my God, there’s all this great stuff, you can buy debt at 60 cents.’ A lot of people in credit are paper investors. We’re the furthest thing. We like paper, but in only a few years out of 10 is it interesting, so it’s cyclical. We invest money pretty steadily.
We made two senior secured loans in the last few months where there were real issues around the businesses. We bought into the largest parking garage company in Europe. It’s recovering from COVID, there’s some real upside operationally. And there was a very large auto parts business with 4 billion euros of debt. And we bought over a billion dollars of that debt at about 40 cents [on the dollar] from Japanese banks.
This company went through a restructuring and the debt got shaved down dramatically and as a result of that, they had it marked at very low prices, and they were not so happy. So they sold it. And it wasn’t like we bought $50 million of it and we’re crowing about it — we bought over a billion dollars of debt.
Everything I’m describing is not like stuff you see on the screen. This is not a market for your regular dude buying regular debt. But the skills it takes to do it are just so different level.
In a good year we’ll invest $400 million or $500 million a month. In 2022, as the Fed started to raise rates, we were investing $175 million per month. In 2023, we stepped up to $300 million a month. And we’ll be back to $500 million in 2024.
A ton of money has come into private credit. Does this end badly?
The lending that’s happening right now, I think, is good lending. We’re going to look back at 2023-24 and say, ‘boy, those were really good vintages.’ In the old days, you had to lever up somebody six and a half times. You provide them junior capital, which might take you from six to eight times or something.
But what about the old ones, you ask? So many people are rightly excited about doing direct lending today. Perhaps they should have been a little less excited in 2021.
We’ve seen a bunch of consolidation among managers. Is that something you’re considering?
Each one of us has a very distinctive culture. If we get the culture part of it wrong, it just hurts. In our firm today, nobody is paid based on their deals. We have 30 people in the firm who are carrying the firm’s funds, and it’s global carry. If you end up buying something, the culture needs to work.
You obviously like your business model. Is there another one out there you’re slightly jealous of?
These guys at Blackstone, to be able to go out and start from your private equity roots to build that real estate business, which is a market-leading business. It’s not put together with marketing spin. It performs. You’ve got to be like, Wow.
