‘Who’s the Next Winner?’: Diameter Capital’s Scott Goodwin

Current Credit Market Assessment & Risk Signals

• High-yield credit spreads are currently hovering near the 90th percentile at approximately 3%.
• While headline default rates appear contained, underlying stress is emerging in specific sectors:
  • US Consumer: Low-end and younger consumers (20-somethings) show deteriorating employment and spending, yet bank balance sheet data masks the true leverage levels.
  • Private Credit Exposure: Online consumer lenders (e.g., Upstart, SoFi) have grown 700% over five years; their exposures are shifting to insurance company balance sheets via ABS, bypassing traditional bank credit data.
  • Housing Market: The US is in a housing recession post-2022 inflation spike, with new and existing home sales at historically low levels despite significant debt in the left-finance sector.
  • Secular Disruption (GLP-1): The rapid adoption of GLP-1 weight loss drugs (exceeding statin penetration curves) is creating a secular headwind for packaging and food/beverage companies (wine, beer, junk food), a sector previously considered defensive.

Investment Philosophy & Strategy

• Total Return Focus: Diameter Capital employs a credit strategy similar to equity long/short funds, analyzing macro trends, sector cycles, and security price impacts over 3 to 24-month horizons rather than relying on static ratings or index inclusion.
• Active vs. Passive Approach: The firm actively avoids "hugging the index" or relying solely on S&P/Moody's ratings, preferring to price assets independently and identify mispricings in unrated or non-indexed securities.
• Capital Structure Discipline: In AI infrastructure and chip financing, the firm prioritizes senior debt to mitigate risks regarding future residual chip values, which they view as unpredictable beyond a 3-4 year horizon.

Specific Deal Narratives & Outcomes

• Twitter (X) Debt Transaction:
  • Leveraged proprietary data scraping on ad revenue to identify an inflection point in Q4 2024 prior to public recognition.
  • Collaborated with Goldman Sachs bank partners and large family office LPs to underwrite and bid on distressed Twitter debt.
  • Executed a transaction at low 90s pricing with a 13-14% yield; current mark-to-market suggests the debt is significantly undervalued relative to the company's valuation post-merger with xAI.
• AI Infrastructure Play (Commercial Fiber):
  • Purchased unsecured debt of a mid-sized telecom company in a distressed group in late 2023 at 30 cents on the dollar.
  • Provided subsequent capital to secure the position; the company secured over $10 billion in hyperscaler fiber contracts in 2024, driving the debt to par.
• Spectrum Bet:
  • Made a strategic bet on a US satellite company (largest spectrum owner outside major telecoms) anticipating demand from IoT, robotics, and Starlink.
  • Executed a capital raise transaction; the company subsequently sold spectrum to larger entities, returning debt to par.

Sector Risks: Software & Private Credit

• SaaS LBO Vintage Risk: Private credit markets hold significant exposure to software LBOs originated pre-GPT (late 2010s/early 2020s) at high leverage (9-10x).
• Differentiation Challenge: Unlike the 2014 oil crash where geological data allowed for differentiation, the SaaS sector faces high correlation risk due to AI displacement.
• Default & Recovery Outlook: Diameter expects increasing defaults in the SaaS space with notably low recovery rates, as business models can deteriorate rapidly (churn rising from 98% to 90% retention) and loan documentation is often weaker than in asset-heavy sectors.
• Portfolio Construction Warning: The firm criticizes the high concentration of one-third of credit portfolios in the SaaS sector, viewing it as a structural flaw compared to equity portfolio management standards.

Diameter Capital Origin & Goldman Sachs Partnership

• Founding: Established in early 2017 by Scott Goodwin (ex-Anchorage) and Jonathan Lewinson (ex-Anchorage researcher) after years of weekend strategy sessions.
• Goldman Sachs Relationship:
  • Goldman Sachs (GCM) and CEO David Solomon were Day One investors; Solomon was the first visitor at their initial Bryant Park office.
  • The partnership facilitated key transactions, including the Twitter deal, through shared research and bank syndicate engagement.
• Leadership Dynamics: The firm values transparency with bank partners, sharing research to help syndicates make smarter decisions, contrasting with the traditional "keep secrets" approach.

Personal Background & External Ventures

• Early Inspiration: Goodwin's entry into finance began with Bill James' fantasy baseball (1988-1989), which taught him data analysis and trading dynamics at age 12.
• Soccer Investment: Goodwin is financially backing the US Men's National Team's coaching staff for the 2026 World Cup; he partnered with Ken Griffin to fund half the costs for hiring elite coach Mauricio Pochettino.
• Investment Mentorship: Cited advice from Dan Allen (former Anchorage president) regarding the value of autonomy and the benefits of working for oneself to set one's own tempo and transparency levels.

Forward-Looking Statements & Market Expectations

• AI Microcycle: The firm views the current AI investment phase as a "super-duper microcycle" lasting longer than many investment careers, with the next phase (inference and deployment) driving demand for commercial fiber and spectrum over immediate chip capex.
• Software Cycle Correction: Anticipates a "slower bleed" in software defaults similar to the 2014 oil sector, rather than an immediate crash, allowing for active buying of high-quality assets at distressed prices.
• 2026 Focus: Expects the 2026 World Cup and the shift from AI capital expenditure to AI adoption (identifying winners and losers in the market) to be the two primary themes in the US over the next two years.