FEG Bridge Insight with Victor Khosla







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Founder and CIO of Strategic Value Partners, Victor Khosla has seen significant shifts in the distressed investment landscape since he first founded SVP in 2001. In this episode of the FEG Insight Bridge, Victor shares his insights on how SVP has effectively differentiated itself from other private credit firms and why focusing on operational improvements rather than financial engineering is a better play for strong returns.

He also discusses the value of sourcing distressed debt opportunities directly (a unique approach) and how distressed debt investing can be used to advance social good. Finally, he explores the role of rescue financing in scaffolding companies’ success and which sectors are looking most enticing in the face of oncoming recession. You won’t want to miss this exciting episode!


00:00:00 Intro

00:00:33 Episode overview

00:01:39 Introduction to SVP

00:04:48 How Victor got into distressed debt investing

00:07:28 What differentiates SVP from competitors

00:11:19 The social good of distressed debt investing

00:13:09 Pursuing ESG through distressed debt

00:17:36 Investing in the U.S. vs. Europe

00:22:02 Sourcing European distressed debt

00:27:25 Sectors Victor finds particularly exciting

00:31:15 Changes in the corporate balance sheet in the current cycle

00:34:57 The current players in the distressed debt markets

00:40:03 How SVP utilizes private lending

00:44:14 Victor’s hobbies and philanthropic causes



Victor Khosla

Founder & Chief Investment Officer of SVP Global

Mr. Khosla is Founder and Chief Investment Officer of Strategic Value Partners, LLC (SVP), a $17.2 billion global alternative investment firm, focused on distressed and deep value opportunities. He established SVP in 2001 and has built one of the leading firms in the business, with approximately 125 employees and offices in Greenwich, CT, London and Tokyo.


Greg Dowling, CFA, CAIA

Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.


Greg Dowling (00:03):
Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG, an institutional investment consultant and OCIO firm serving nonprofits across the U.S. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insights on how institutional investors can survive and even thrive in the world of markets and finance.
Greg Dowling (00:33):
We are excited to discuss distressed debt markets with 30-year investment veteran, Victor Khosla. He's the founder and CIO of Strategic Value Partners, also known as SVP, an industry-leading private credit firm with roots in credit, distressed, and private equity investing. After a decade-plus of gorging on zero rates and easy credit, how do corporations deal with inflation and rising rates? That question is especially relevant in Europe, where they have barely recovered from their last calamity and are now facing an energy crisis due to the war in Ukraine. Additionally, Victor discusses how debt markets have evolved and changed from the previous cycle, where opportunities lie, how Europe differs from the U.S. and Asia, and is there a social good to distress investing?
Greg Dowling (01:26):
Victor, welcome to the FEG Insight Bridge.
Victor Khosla (01:30):
It's a treat for me to be here, Greg, thank you.
Greg Dowling (01:33):
Yeah, well thanks for being here. Would you mind telling the listeners a little bit about yourself and SVP?
Victor Khosla (01:39):
I'm lucky enough to be Chief Investment Officer of Strategic Value Partners. We started the firm 20-odd years ago in 2001, and over that period of time the firm has grown, it's developed. We have about $16 billion of assets under management today. We started out focusing on distressed debt and restructuring 21 years ago. Over time, as the firm has grown... One of the first things we did in 2004, was we started to build a business in Europe out of London. About 40% of our portfolio's in London, 40% of our investment team is in Europe. So we have become—right from the get-go we became a U.S.-European firm, not just a U.S firm. Over time, we've broadened out our brief. We used to focus on corporate restructurings, corporate debt, and over time we started to get into all these hard asset sectors.
Victor Khosla (02:44):
Whether it is buying airplanes—and by the way, it's only interesting buying planes 2 out of 10 years, other times they're just too rich, too expensive. We started to invest in infrastructure; we bought waste-to-energy businesses; we own two roads today, one in Portugal, one in Texas; and then over time there are parts of real estate we got interested in. Power generation, producing electricity, has become a big area for us. For us as a firm, 60% of what we do is corporate, 40% is in these hard assets. The last thing I wanted to really highlight—for us as a firm, Greg, as we grew, we started to take control of businesses through a distressed debt or a restructuring process. We found that businesses which got into financial trouble, there's a lot of low-hanging fruit, but to get it, you have to take operational control. You often have to strengthen management and you have to build a new business plan. Today, there are 15 businesses where we have operating control with 70,000 employees. So when you look at us as a firm—from our roots 21 years ago focusing on distressed debt and restructurings to a firm which is U.S. and Europe, a firm which is not just corporate, but focused on all these hard asset sectors, and then a firm which has the skills to take operating control and improve businesses—the firm itself has gone through a transition. We today have 175 people globally and 80 of them are investment professionals.
Greg Dowling (04:36):
Perfect. Well thanks for that update. I wanted to maybe start talking about you and your history. I meet a lot of younger people, and many of them who have an interest in investing will say, "I want to get into picking stocks." How do you get into distressed debt investing? Did you grow up as a kid, going, "I want to be distressed debt guy"?
Victor Khosla (04:56):
[laughs] No, it wasn't... I didn't grow up as a kid thinking that either, Greg. In a lot of ways, I am... After business school, I ended up working as a strategy consultant at Booz Allen. And the consulting world was great, I loved the job. But a life of the mind where you do a lot of analyses, put a lot of presentations together, it wasn't for me. I always wanted to work on Wall Street, so I ended up getting a job at Citibank as a strategy planning guy. Two years into it, they said, "Boy, there's a distressed business which is starting." And I wrote the business plan for it. Bloomingdale's had just gone into bankruptcy. Macy's had just gone into bankruptcy. This is 1991. I raised my hand and I said, "Hey, how about me?" [laughs]. And only Citibank in 1991, they said, "Why not?"
Greg Dowling (05:48):
Victor Khosla (05:49):
So here I am, I'm 33 years old, I have never traded a piece of paper in my life, and I'm suddenly buying and selling distressed debt, trading distressed debt. That's how I started. And what happened was, the business itself, where companies got too much leverage—with the leverage buyout boom came the restructurings as companies took on too much debt. Twenty percent, 25% of the time a company defaults on its debt, statistically. And that business just boomed. I was really in on the ground floor in terms of first trading then investing in distressed debt.
Victor Khosla (06:32):
And as that business grew... The sort of skills I had, Greg, I was never a trader-trader. I grew up as an analyst doing strategy planning. So for me, it was a very natural transition to work in a business where valuation and analyses and business strategy mattered, it wasn't just all about buying and selling debt. My preparation, however unorthodox, was really good preparation for a business which was just starting. That was the beginning. I've been lucky. I worked with some great people, I worked with a few great businesses. And I was lucky 21 years ago to be able to start Strategic Value Partners.
Greg Dowling (07:15):
It always helps to be lucky, and then you’ve got to be good.
Victor Khosla (07:18):
Greg Dowling (07:19):
That's a great story. Distressed debt investing... Obviously SVP does a lot more than that, we're going to hit on a little bit of distressed debt, and we'll hit some other things as well. But pure distressed debt can sometimes get vilified in the press. Is there a social good to distressed debt investing and how does SVP differentiate itself?
Victor Khosla (07:38):
Two different questions there. Why don't I answer the second one—why don’t I take it on first?
Greg Dowling (07:43):
Victor Khosla (07:44):
Most people who invest in credit, who invest in debt, they are much more paper investors. They are all generally very good at buying paper. They're good at structuring the paper—or restructuring the paper—and then a couple of years later, the new debt, the new equity, it either gets paid off or they sell it. But the core business, the DNA of all the people involved in it is paper. When you look at somebody like us, when you think about the differentiation, we're really different two ways. The business of buying paper, there are people like Goldman and Merrill—a group I used to run—they are the middlemen. But the way this business works, when it is really good, Greg, they keep the paper. I used to run one of those desks. When it is so-so, they distribute it, they syndicate it.
Victor Khosla (08:38):
So about 15 years ago, we said, "Hey, we had enough fun with this business model, we are going to call banks and other owners of debt directly." Very unusual. Still very unusual in our business. And today, 60% of what we buy, we buy directly. Yes, we deal with Wall Street, but 60% we buy directly. And by the way, there's a real advantage to this. You see stuff early. This business is still inefficient. A selling bank would say, "Hey, I’ve got a...” We just bought some debt in a Japanese company. The selling bank said, "Hey, the best bid I got was $0.36, can you pay me a little bit more?" It happens. When you are sourcing directly, you see stuff early and you are able to get those [inaudible ]. So that's one source of competitive advantage. The second source for us of differentiation, is this ability to take control and to operate and improve businesses.
Victor Khosla (09:38):
Now most people, when I think about our industry, when a company gets troubled, some of our peers, they might say, "Hey look, here's a 32-year-old vice president, he's going to be on the board of directors. And by the way, hey vice president, can you just oversee the business?" If there is low-hanging operational fruit, you've got to often change or strengthen management teams. You've got to build new business plans. Today we have 16 operating partners, employees of the firm, away from our deal team,  and they work with our portfolio companies to be able to do those things. When I think about our peer group, 3, 4, 5 of them out of the 100 have direct sourcing capabilities. What I would tell you is we've got much bigger, more senior teams than anybody, and there are 2, maybe 3 who have operating partners. Literally 2, 3 out of 100 have operating partners. We've got 16 of them working on our portfolio of companies. So I think the differentiation is how we approached the business with that early focus on Europe, which is much more inefficient, and at the same time have a completely different mindset—which, by the way, I'm bragging now, Greg—which ends up with a very differentiated, very superior set of returns.
Greg Dowling (11:02):
Alright. So what I'm hearing is less financial engineering, more looking for businesses that you can operationally improve, taking that business consulting beginning and background that you had and applying it to distressed debt investing. Is that a good way of saying it, Victor?
Victor Khosla (11:17):
It is. I couldn't have said it better.
Greg Dowling (11:19):
But you didn't answer the question, is there a social good. I think there is based on what you said, but just in general, why should distressed debt managers exist?
Victor Khosla (11:27):
When you think of businesses which get into financial problems—too much leverage—what happens is management teams start to walk away from those businesses because they say, "Here my equity options are worthless." And when you get too much leverage in a business, nobody's thinking about a business plan or what is the next step forward. So you have companies which have essentially been abandoned. Now in comes somebody like us with the skills to really fix what is broken, also de-levering the capital structure. The company might have $1 billion of debt, and through a restructuring we convert it into $400 million of new debt and the rest of it becomes equity. So we've delevered the business, we've strengthened the management team, we've built a new business plan. It's what we do. When you think about a zombie company versus... For us, the value is in doing all those things. We are called all kinds of nasty words. You are polite, Greg. In some places, the word used is “vultures.”
Greg Dowling (12:38):
Victor Khosla (12:38):
I remember working in Japan, the word was “blackbirds.” The words are all edgy, the words are all nasty. But when you look at what we are doing... And by the way, the end result for us is we end up with these really hopefully stronger businesses that we are looking to sell—often, by the way, to private equity or strategic buyers, or listing them. I think the characterization's sort of uncalled for, but I'm familiar with the characterization.
Greg Dowling (13:09):
Heard the terms before. One of the things too, which may be a little contrary to what people think is you actually pursue some ESG-style improvements in some of your investments. How do you do that in a distressed debt investment?
Victor Khosla (13:19):
For us, there's a lot of stuff around ESG which is good. I don't necessarily subscribe to every little piece of it, but there are parts of it which are really good. When you think about, particularly... If you start with "E," what I've generally found is we've made some very profitable investments in power generation using electricity. There's a company we took over called GenOn, where we became majority equity owners. It's the eighth-largest power-generating company in the United States. They had four coal plants. The coal plants were losing money, they were obviously emitters . For us, over a multi-year period we ended up shutting down the coal plants. It was an economic decision; they are losing money, it's the right, reasonable, rational thing to do. Now you could say, "Boy, you're very environmentally friendly." Trust me, I'm much more financially friendly too [laughs]. Just how it works.
Victor Khosla (16:04):
What we have found is, when you look at the... We've ended up hiring some senior women in as directors, as chairmen of our portfolio companies, and it's been really additive in terms of what we've been doing. When you think about having the right governance around it, how can one argue talking about the "S" and the "G"? It's such a social good, it's additive financially, it's hard to say, "I'm not going to focus on social." When we think about... There are parts of this business we are obviously just not interested in. We don't really want to be around emerging markets very much, where there is a lot of corruption around a whole bunch of these businesses. But I think that's just good housekeeping, in terms of what it is. So yes, I don't necessarily agree with every little bit of what "E" and "S" and "G" is, but a lot of it we agree with, a lot of it we've been following up on over 21 years. And we've continued to really build on it even over the last 2, 3 years.
Greg Dowling (17:25):
Yeah, sometimes it actually makes financial sense to do, and there's some great societal benefits as well, so that's great. You mentioned this earlier, about having your business really split between Europe and the U.S., and because of that you pick up some ancillary exposure to other places, of course. But maybe let's just focus on, for now, the U.S. and Europe. How are they different. How's the environment different in the U.S. versus Europe—either from sourcing, from creditor rules, the whole gamut. How are they different?
Victor Khosla (18:07):
The U.S. is a larger, more efficient market with a set of rules and a set of processes which are codified and followed again, again, and again. So when you think of U.S. businesses, it’s one where financial problems tend to happen in a little bit more of a cyclical way. It is not like there are economic cycles, there are cycles where the economy is reasonably strong. I think for somebody like us, we cover so much ground between hard assets and between controlled investments that we stay pretty busy all the time. But in the U.S., we find that it will be more cyclical, and when things are bad, which is kind of where we are a little bit right now, we do get a little busier. When you compare that to Europe, it's just in a very different place, because the way the EU has been created where there's a common currency but there's not a common governance, those tectonic plates keep rubbing against each other.
Victor Khosla (19:33):
Every 2, 3, 4 years there's something happening with the EU which creates problems, whether it is when Britain was part of the EU, whether it was like Brexit or not. Or is it like, “Boy, the Italian government has just a little too much debt,” or “The Spanish government has too much debt and it's going to create a crisis for the Euro currency.” What we’ve generally found with Europe is you've got these tectonic plates, so there are these mini cycles every 2, 3 years, while in the U.S. you seem to have these cycles every 6, 8 years. Europe also has a set of laws around restructurings. It has a set of rules and processes around how you work with working through labor issues, for instance, which are all different country by country. When you look at something like that, it's fractured. To really be focused on Europe, you've got to become a country specialist also, because the laws and the rules are very different, not to mention that those little mini cycles keep coming at you.
Victor Khosla (20:52):
So what we found with Europe is just much more consistent flow. One number, Greg, you'll get a kick out of is there’s $100 billion of troubled loans on U.S. bank balance sheets. There is $700 billion euros of troubled loans on European bank balance sheets, and the number is supposed to get to $1.2, $1.3 trillion in this cycle. Right there, you get a sense of the size of the problem, and then the fact that you've got all this underlying complexity in Europe, you end up with fewer people who really know what they're doing. It just makes the European market, for people like us... It's so much more inefficient. And by the way, Greg, as you're probably picking up, inefficiency we like. [laughs] We like the fact it's inefficient and we are one of the market leaders in a world that’s like that. 
Greg Dowling (22:02):
Can you source that? I think of... If you can parse that number a little bit, when you said $700 billion euros. Everybody was very excited about the distressed opportunities in Europe post the GFC. It just took forever because the banks didn't sell. They're much slower on the Europe side than they are on the U.S. side. So how much is legacy debt that's still sitting out there versus maybe new distressed debt that Brexit, COVID, or the Russian-Ukraine issues on energy have created? How much of that is new, how much of it is old, and will they actually sell this time?
Victor Khosla (22:47):
We had the longest wait for a while after 2008. We really found that... In 2011 you had the Greek crisis. Europe went into a recession, the US didn't. So what we found was, it's really subsequent to that Greek crisis that the selling started. The ECB started to make European banks write-down the loans on their balance sheet post the Greek crisis, and that's when the selling started. You know, Greg, for the longest time, like in 2009, 2010, 2011, we were trying to buy debt—and we did, we bought some good debt from European banks. But I remember there was a big Spanish bank we had done a lot of business with, and he always used to have a lot of time for us. My colleagues would go to see him, and he would say, “Yeah, come on over.” The usual Spanish lunch, which is 2.5, 3 hours, finishing up with a nice glass of port or something. And then we called him up in 2012 and my colleague said, “Hey, Alvero, I only have 30 minutes today for you.” And Alvero said, “Why?” He said, “The ECB is here, they're making me write-down my books.” [laughs] 
Victor Khosla (24:12):
So what we found was, there was a real change in behavior in 2012, and the ECB has kept the pressure on. They put equity into the banking system. The government's put equity into the banking system. The write-downs started. It’s still not as fast and as quick to act like the U.S., but it has gotten so much better. So when you look at the $700 billion of debt going to $1.3 trillion, I think, as you can imagine, that extra $600 is all new. 
Greg Dowling (24:49):

Victor Khosla (24:50):
And of that $700 billion which is out there, there's still $300, $400 billion from the old days, but a couple of hundred billion accumulated after COVID. A lot of the stuff is really quite new, and the new stuff which is obviously coming on today. I do think there's a change in behavior which has taken place in the European banking system.
Greg Dowling (25:20):
So you think that this next cycle, because of those changes, they will start to sell it out there much quicker? You're not going to have to wait till someone puts a gun to their head again, everything's sort of set up to have more selling?
Victor Khosla (25:34):
It is. And in fact, Greg, if anything... When you look at Europe today, Q4 GDP in Europe was negative. Q1 ‘23 GDP in Europe is expected to be negative. They’re already in a recession. 
Greg Dowling (25:55):
Victor Khosla (25:56):
Europe is already in a recession while we are still trying to ask ourselves, “Hey, in the U.S., are we going to be in a recession in the second half of ‘23 or not?” So what you have is... The problems there—and obviously with electricity prices, which are a special piece of what has created the problems there, the war in the Ukraine and the concurrent rise in electricity and commodity prices—it just hits Europe so much harder. The problems are there. I think our view would be in the cycle which we are in now... Historically, for the longest time we’ve been almost 50-50 U.S.-Europe, and then after COVID—it happened so quickly, it was gone so fast—we were 70% U.S., 30% Europe. But over the 7, 8 years pre-COVID we were 50-50. I think our best sense today when we look at our pipeline, we look at this emerging opportunity, we also think we are going back to that 50-50 between the U.S. and Europe. And if anything, the first year, 2023 particularly, we think we might be even a little bit more European heavy in terms of places we are investing.
Greg Dowling (27:25):
Is there any change or any sectors or industries that are particularly interesting right now? You've mentioned power generation and you've done a lot of that. Electricity is a huge issue, natural gas. Is that going to be an area or are there other areas in Europe that you kind of see as less company specific and more industry specific? 
Victor Khosla (27:48):
We like these old economy industrial businesses, packaging businesses, printing material businesses, chemical businesses. In all these sectors, you've had this huge rise in raw material prices. When you get commodity prices up 70%, 100% over the last couple of years, you've got to pass those commodity prices through to your customers. Sometimes you can, and sometimes you can't. Sometimes there are delays in passing them through. So what we find in all these industries, in these basic manufacturing industries, when you marry all that with a lot of leverage, because there's a lot of inherent leverage which private equity investors have taken on, you create that train crash. To our point of view, all these sectors in Europe—especially in conjunction with not just higher raw material prices but lower volumes, which is what happens with a recession—we find there's just a lot of interesting stuff already here today.
Victor Khosla (29:16):
And by the way, it's not just confined to Europe. In the U.S. you can see some of those. We like those kinds of industries, those kinds of sectors, and we are already very focused on that. Greg, I think our view would be... What happens is, as you get into a recession—in Europe, you're in a recession, in the U.S., we think you're likely in one too—you're going to see a slowdown in volumes. You're going to see problems with the price passthrough. You're going to see lower [inaudible]  levered capital structure. You're going to see businesses in financial trouble. Now what happens is, it doesn't stay there, it bleeds out into the rest. The fact that Europe accounts for 35% of the high yield universe, you take all these industrial businesses on both sides of the Atlantic, it just bleeds out into kind of the rest with a recession. And we think we are, in that slow motion way, we are bleeding, we are creating those kinds of problems and issues. It won't just stay limited to some narrow sector; it will affect just about every high yield business out there.
Greg Dowling (30:45):
That's very helpful, thank you for that real-time view into both Europe and even the U.S. As we think about what this cycle may look like and how it may differ from the last real cycle we had—so 2008, 2011 in the euro zone... We didn't really have one with COVID, there was just too much liquidity pumped in. There were certainly a few companies that were in stress, but not many because there were plenty of funds. So because it's been a while, how has the corporate balance sheet changed? Is it materially different in how it's structured than it was last cycle?
Victor Khosla (31:26):
In every one of these cycles what happens is, when you have a well-functioning economy, you have growth, you get all these kinds of buyouts done, and people start to get 6x, 7x leverage to EBITDA. So you've got peak EBITDA and you get peak leverage, just in terms of what happens every time we go through this kind of an upcycle. Now the other thing which has happened is... In 2001 when we started, debt secured by airplanes, for instance, used to be a very small market, less than $100 billion. Today, debt secured by airplanes is a $550 billion market. Infrastructure debt is well over $1 trillion today, but then those businesses were just starting. This growth of leverage, not just in companies, but to buy airplanes to make infrastructure investments, to do some real estate—I mean, this thing has just become so huge. So marry the two together.
Victor Khosla (32:54):
What you've seen is the corporate debt business has gone from $200 billion in 2001 when I started to $4.5 trillion today. Add in all those numbers around airplanes and infrastructure and real estate and power generation. Europe used to be a know-nothing business in 2011. They hadn't discovered leverage buyouts really then. Today, Europe accounts for $1.5 trillion of high yield bonds and loans. When you think about how this business has changed, you can see the size of it—how it’s mushroomed—but you can also see different pieces of it which never really existed before now. It's quite a big pie, it's quite a complex pie, just in terms of what it is. So yeah, as I started out with, Greg, you start with peak earnings at peak leverage at the same time in every one of these subsectors. So we've created quite a few headaches for ourselves to work through over the next few years.
Greg Dowling (34:12):
Lots of debt everywhere. That seems like maybe not a great thing, but a very good thing for you, at least, at SVP. The opportunity set is rich for you. We talked a little bit about inefficient markets in your comment about Europe generally being a little less efficient than the U.S., but I think of just the overall competitive landscape and how that has changed a little bit. It used to be non-economic sellers and you know, I think of, gosh, Caesars may be the poster child of this, where you had sponsors fighting, hedge funds fighting another hedge fund. 
Victor Khosla (34:56):
Greg Dowling (34:57):
Those are really sophisticated participants. Is that what it has become? Or are there still opportunities to find those true inefficiencies where you're buying from a bank who needs to sell?
Victor Khosla (35:10):
That sort of fighting like you're describing in Caesars is just par for the course in the restructuring business. And I think, as you well know, that fight was five years, seven years, eight years ago, not even today.
Greg Dowling (35:28):
Victor Khosla (35:29):
To our way of thinking—and please, I'm just going to step back for a moment. In 2008, there were 40 people with $1 billion or more in the distressed hedge fund world. There were a few people with lock-up capital in addition to that, but there was 40 people in the distressed hedge fund world of any consequence. That group of 40, those specialists, are now down to 10. There's almost been no new entry in that business at all. The other 30, they retired, or they got wiped out of these kinds of crises. But today there are literally 10 people from that group of 40, and those 10 people today are much larger than they used to be in 2008. The thrust of what I'm saying is, yeah, it's a competitive world, but the buy side, at least a number of people who've got real skills to restructure, people who can even perhaps go out and take operating control and improve businesses, it's not such a big group of people. 
Victor Khosla (37:07):
When we look at this market now and we look at this opportunity which is coming at us with a new cycle, we know it's going to be really competitive for more of the liquid stuff, the big cap restructurings. If a company with $10 billion of debt is going to have problems, there will be people all involved, because it's a liquid name, it's kind of event-driven, right? But when you get down to $1 billion, $2 billion, $500 million businesses which need to work through a restructure, or you are buying $200 million in airplane debt backed by 9 planes, that world, there aren't quite that many people with the skills. And look, in the end there are always fights, this business seems to get all the fights out. Cesar was one of the worst ones, but in some manner, shape, or form, there's always a fight. Whether it's between creditors with each other, which is a relatively new trend. Creditors with the equity holders, boy, that stuff has been going on for 25, 30 years, those fights are just endless. But that gives you kind of a sense. 
Victor Khosla (38:28):
Look, we like--please, I mean this well--in a nice way, we love the fact that the banks are still non-economic owners of distressed debt. When a bank is looking to sell, they're not asking, “What is the value?” They're saying, “What is my price? How much have I already morphed it down to, and can you pay me that price or more?” So they are still non-economic sellers. Some of the asset managers who own high yield debt—25% of high yield debt is owned by ETFs and high yield funds which offer daily, daily liquidity. So every time you have a bad market and they have redemptions, they have to sell immediately. They can't even hold for a week. We still like the fact this market is shaped where the sellers are so many still uneconomic and on the buy side you have fewer people today who are real specialists who know what they're doing. We think it's an interesting market. And you take all those trends to Europe, Greg, which is kind of where you were digging into earlier. Europe just has even fewer people with the skills I'm describing. We find it to be still one of those interesting businesses, where the buy side, the right buy side, the ones with the skills is well advantaged.
Greg Dowling (40:03):
You know, we're talking primarily about distressed debt investing, but you guys do a whole lot of other things too, including private lending. Is that just another tool that you have a relationship with a company—or maybe you haven’t, maybe you're establishing it—and they need a capital solution and they're not going to go through a bankruptcy, that's when you can do the private lending? How does that play into your toolkit?
Victor Khosla (40:33):
As a firm, we've always done DIP lending or rescue financing, it's just been part of our toolkit.
Greg Dowling (40:46):
Maybe just to stop you. I know what a DIP loan is, but maybe for listeners who don't know what a dip loan is, maybe you could stop and just kind of explain. What does “DIP” mean? 
Victor Khosla (40:56):
When a company goes into a restructuring or a bankruptcy they need money, so what they'll typically offer is they'll say, “Hey, if you lend me money in a debtor in possession, DIP loan, you are the senior most piece of debt in this capital structure.” So you offer rescue money to stabilize a business when it's filed for bankruptcy, and you make it in the way of a DIP loan. And by the way, companies pay because they're quite keen to raise this money and they need to raise it quickly, so they're willing to really pay out for it. For example, last year, we lent $200 million to LATAM, the Latin American airline, at [inaudible]  plus 13.5%, and this is the senior-most debt in their capital structure. As a firm, we've always done that DIP lending, we've always done the rescue financing. And Greg, what we are starting to do more and more in this current market is offer a much more capital-solution-like help.
Victor Khosla (42:15):
For example, today there is a power plant which produces electricity, it has $500 million of debt which is maturing in the next few months. It's all bank debt. The power plant produces about $100 million in cash flow. They can't refinance all $500 in this market. The equity guy doesn't have the money to put into it. So what we've offered is, we said “Hey banks, we will inject $150 million in junior debt below $350 million of senior debt. So you take your $500 and you cut it down to $350.” We’ll offer you the $150 million of junior debt because we think the debt is covered and we will make something like an 18%, 19% return on it. 
Victor Khosla (43:19):
In this case... You know, we own GenOn one of the larger power generating companies. We've had those guys work with us on the diligence of it, so just in case they can't pay our debt, we will end up, obviously, with possession of that power plant. And we do think the power plant is worth much more than $500 million. For somebody like us, offering this kind of a capital solution for the right kind of return... And you know, we are back again, Greg, in a world where capital is somewhat dear. And to us, we are broadening out our rescue financing, our DIP lending business in this market, offering those kind of capital solutions. It's just a natural outgrowth of our core business.
Greg Dowling (44:14):
That makes sense. So I know you're a huge tennis fan, are there any similarities between tennis and investing?
Victor Khosla (44:25):
I hope not that much. I've been playing tennis for 50 years and I just haven't gotten very good.
Greg Dowling (44:32):
Victor Khosla (44:33):
Greg, I'm still on the B team, I can't make it to the A team in my club. I hope the similarities end there. But no, I am a huge tennis fan.
Greg Dowling (44:45):
Do you have a favorite player?
Victor Khosla (44:48):
I always liked the big three, but I'm going to have to find new guys. I don't know if you've seen Carlos play.
Greg Dowling (44:58):
Yeah, I have, on TV at least.
Victor Khosla (45:00):
He is just—oh my God, the way the guy can cover the courts. He reminds me of a younger Nadal or a Pete Sampras. But I like the big three. It was so much fun to watch them for a couple of decades.
Greg Dowling (45:18):
It seems like there is a youth movement coming up, and a lot of big retirements the last few years. I thought you might say something about avoiding faults. I thought that was like a natural beach ball for you Victor, like “Hey, you know, you don’t want to double fault on investing” or something.
Victor Khosla (45:39):
I'm still a little pissed about still being on the B team but...
Greg Dowling (45:45):
Alright. Well, hey, I was also going to ask you something that you’re not on the B team for. Other than investing, you've spent a lot of time on educational not-for-profits. Is there a reason why, and what are you doing there?
Victor Khosla (46:02):
I just find that education is such a driver to take people up. The Gates Foundation does a whole bunch of different things with health and so on and so on—all amazing things. But in some small way, for somebody like me, my family has, I have, we’ve just chosen to focus on education. So there's a Boys and Girls club in Greenwich. We are headquartered in Greenwich, Greg. And Greenwich has this reputation of being such a rich town. Can I tell you? Huge need in this town. All the people who work in shops, the policemen, the housekeepers, their kids go to the Boys and Girls Club. We started to sponsor 20 of those kids to go to college every year. The firm's gotten really engaged, we have summer internships for them where they come into the firm at the same time. And Greg, can I tell you, a lot of these kids, they have never been in a business setting.
Victor Khosla (47:24):
Forget about being in a private equity fund. With mentors from SVP, with coming in for a summer internship, besides the college scholarship... But you know, look, we are so delighted. And by the way, I think it's changed the culture of the firm even in a nice way. Whether it's the Boys and Girls Club... There are a couple more organizations I’m engaged with, I'm on the board of one, which is called Pratham which reaches 5 million kids in India a year. I think it's one of the best things my family can do in terms of giving back in some ways.
Greg Dowling (48:06):
That's great. Thanks for your time in those areas. I agree, education is the great equalizer. Any other hobbies or interests? Other than being bad at tennis, what else do you do?
Victor Khosla (48:19):
[laughs] You know, I have a very close-knit family. I spend a lot of time with them. I spend a lot of time at work. I still pinch myself some days, Greg, that I actually get paid to do this job and it's so enjoyable. But no, not very much. I'm a pretty boring guy in some ways. Just in terms of what I do.
Greg Dowling (48:51):
Well, thank you so much for your time. It is one of these areas—distressed—that is so kind of counter market. So as we are into ‘23 and we're wondering what's going to happen to equity markets, what's going to happen to fixed income markets? Will they go down? Will there be a recession? You know what, if there's a recession, that's actually really good for SVP. One way you could still make money is investing in distressed. That, and we just really appreciate hearing your thoughts on the subject. So thanks again, Victor.
Victor Khosla (49:26):
Greg, thanks for having me on. So nice to see you again.
Greg Dowling (49:31):
If you are interested in more information on FEG, check out our website at www.feg.com, and don't forget to subscribe to our communications so you don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed within the unique risk and return objectives of each client; therefore, nobody should consider these to be FEG recommendations. This podcast was prepared by FEG. Neither the information nor any opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views and opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of their firm or of FEG.

This was prepared by FEG (also known as Fund Evaluation Group, LLC), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directly to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202, Attention: Compliance Department. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it. Past performance is not an indicator or guarantee of future results. Diversification or Asset Allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss. The views or opinions expressed by guest speakers are solely their own and do not represent the views or opinions of Fund Evaluation Group, LLC.


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