Distressed-debt funds target private credit downturn as ‘greatest opportunity’ since 2008

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 global financial crisis.

These funds have been largely sidelined for a decade as markets surged, but are now betting on making money from strains in private credit.

They typically invest in companies with bad balance sheets but viable underlying businesses.

“Biggest opportunity since 2008,” said Victor Khosla, founder of Strategic Value Partners (SVP), which manages US$21 billion 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.

This comes amid questions about their exposure to software companies that are at risk of losing out to artificial intelligence.

“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.”

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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, recent research by credit investor Davidson Kempner showed.

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 that the true corporate default rate is far higher than reported.

“Vulture funds” is a sobriquet that gained traction in the 1980s for hedge funds that swoop in when companies run into trouble.

Distressed investors bristle at being called “vulture funds”, arguing that 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 that he and his team go on “regional swings”, which are 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 that 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 US$3.8 billion 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 2025 that he needed to position the firm to make money “when something bad happens”.

This is not the first time in recent memory that 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,” the executive said.

“They’re trying to create a frenzy, because otherwise it’s going to be like watching paint dry.” FINANCIAL TIMES

Additional reporting by Sujeet Indap