Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Investors who specialise in scooping up distressed assets at bargain prices have identified a downturn in private credit as their best opportunity since the 2008 financial crisis.
These funds, which typically invest in companies with bad balance sheets but viable underlying businesses, have been largely sidelined for a decade as markets surged but are now betting on making money from strains in private credit.
“Biggest opportunity since 2008,” said Victor Khosla, founder of Strategic Value Partners, which manages $21bn in assets.
Andrew Milgram, founder of Greenwich-based Marblegate Asset Management, said: “This is not about a few bad loans . . . We’re out in the market right now raising a new fund because this is the greatest opportunity I’ve ever seen in my lifetime. I couldn’t imagine God would smile on me like this.”
Private credit has become one of Wall Street’s top worries this year, as several funds, managed by the likes of Apollo Global Management, Blackstone and Ares, have faced billions of dollars in redemptions amid questions about their exposure to software companies at risk of losing out to AI.
“These outflows have reached a tipping point, whereby everybody on a rational basis has to ask for their money back,” said John Aylward, the founder of Sona Asset Management. “You have a large amount of distress, and you have forced selling, and it’s going to provide great opportunities that we’re already seeing.”
The proportion of US leveraged loans with an interest coverage ratio — a measure of ability to service debt — weaker than a level that is considered stressed has more than doubled to 20 per cent since 2019, according to recent research by credit investor Davidson Kempner.
At the same time, more borrowers are opting to defer repayments and increase their loan balance. This combination has led some investors and analysts to argue the true corporate default rate is far higher than reported.
Distressed investors bristle at being called “vulture funds” — a sobriquet that gained traction in the 1980s for hedge funds that swoop in when companies run into trouble — arguing they are far more sophisticated than the industry’s early bottom feeders. Many are no longer purely distressed investors, having diversified into buying higher-quality credit and equity.
Milgram at Marblegate said he and his team go on “regional swings” — short trips to cities such as Cincinnati and Charlotte to get a sense of the mood there. He takes local bankers out to steak dinners to learn what keeps them up at night.
For the past several months, the picture has grown increasingly grim. Milgram said the head of restructuring at a large regional bank recently told him private equity firms were abandoning deals and handing over portfolio companies at an “alarming rate”.
SVP specialises in hard assets such as Texas toll roads and Europe’s largest car park business. But recently Khosla directed a small team to study software. “We can’t for the life of us figure out who the losers and winners will be yet,” he said. “It’s too early.”
Since the start of 2025, the firm has invested $3.8bn but sold assets worth more than double that amount, far more than usual, suggesting it wants to have cash reserves as distressed opportunities emerge.
“Our view is that the [distressed] situations will overwhelm the amount of dry powder that’s out there,” said David Walch, partner and co-portfolio manager at asset manager King Street, referring to available capital.
Even the biggest players in private credit are preparing for the worst. Apollo’s chief executive, Marc Rowan, told investors in December that he needed to position the firm to make money “when something bad happens”.
This is not the first time in recent memory distressed investors have predicted a downturn. When Silicon Valley Bank imploded in 2023, there was a similar buzz that many more companies might buckle under the fatal combination of high interest rates and heavy debt loads.
Yet that wave of failures never came about. One executive of a top private capital firm said distressed investors were trying to drum up excitement.
“Hedge fund managers . . . have to create a sense of like, ‘the house is on fire, the house is on fire’. What they’re trying to do is to get banks to pull [credit] lines. They’re trying to create a frenzy because otherwise it’s going to be like watching paint dry,” they added.
Additional reporting by Sujeet Indap.