Remember when your biggest worry about software was whether your computer would crash during finals week? Well, Victor Khosla—who manages a cool $20 billion at Strategic Value Partners—has much bigger software problems keeping him up at night.
Here’s the deal: The private credit market (think of it as Wall Street’s version of your rich uncle lending money to businesses) is having what we might politely call “a moment.” And Khosla thinks the recent software stock meltdown could be the domino that brings the whole thing tumbling down.
“One day it’ll really buckle,” Khosla told Bloomberg, which is finance-speak for “this thing is going to blow up spectacularly, and I don’t want to be holding the bag when it does.”
So what’s got everyone’s knickers in a twist? Well, turns out software companies make up about 40% of all private equity-backed loans. That’s like having 40% of your investment portfolio in your cousin’s cryptocurrency startup—it might work out great, or it might leave you eating ramen for a year.
The plot thickens when you consider that UBS (those Swiss banking folks who definitely know a thing or two about risk) recently suggested that private credit defaults could hit 15% if AI disruption gets “rapid and aggressive.” Translation: If robots start doing everyone’s jobs faster than expected, a lot of software companies are going to have trouble paying back their loans.
And here’s where it gets spicy: Blue Owl, a major player in this space, just permanently froze withdrawals from one of their funds. That’s the financial equivalent of your bank putting up a “Sorry, we’re closed indefinitely” sign. Not exactly confidence-inspiring.
Khosla compared the current situation to the mid-2010s energy crash, when oil prices tanked and suddenly everyone who’d lent money to fracking companies was having a very bad time. “The contagion risk in credit—yeah, worry about it,” he added, with all the casual concern of someone discussing whether it might rain later.
The numbers back up his anxiety. Yields on risky private debt have jumped about 200 basis points (that’s 2 percentage points for those of us who don’t speak Wall Street) over the past five years, now hovering around 6.5%. Meanwhile, default rates have crept up to 5.8% as of January.
“Underneath the surface, it is really wobbly,” Khosla noted, which is probably the most diplomatic way to say “this whole thing is held together with duct tape and good vibes.”
The takeaway? When someone managing $20 billion starts using phrases like “fat tail risk” and “contagion,” it’s probably time to pay attention. The private credit market has been the cool kid on the block for years, but even cool kids sometimes face a reckoning.
Whether this turns into a full-blown crisis or just another case of Wall Street anxiety remains to be seen. But one thing’s for sure: Victor Khosla won’t be sleeping soundly until this software situation sorts itself out.