Apollo Global Management’s John Zito has expressed a stark view regarding the valuation of software holdings by private equity firms, stating that these valuations are likely inaccurate. Speaking to clients of investment bank UBS, Zito, co-president of Apollo’s asset management division and head of credit, highlighted a troubling trend where the shares of public software companies have plummeted in response to advances in AI technologies from companies like Anthropic and OpenAI. This decline has raised concerns about potential obsolescence and inadequate valuations among private credit lenders.
In the first quarter, retail investors withdrew approximately $10 billion from private credit funds, influenced by worries over these outdated asset valuations. Despite this turmoil, several industry leaders are attempting to reassure the market by asserting that the core operations of these software companies remain solid. However, prominent financial institutions, such as JPMorgan Chase, have begun reducing lending to these sectors, acknowledging the risks highlighted by market figures including Jeffrey Gundlach and Mohamed El-Erian.
Zito, acknowledging weaknesses in the market, pointed to software companies that were acquired between 2018 and 2022 as particularly vulnerable due to higher valuations and lower interest rates during that period. He cautioned that private credit lenders might face substantial losses, estimating that recovery rates on loans to smaller software firms could be as low as 20 to 40 cents on the dollar.
While the situation appears dire for those heavily invested in software-related lending, Zito believes that the broader private credit asset class will ultimately endure the current challenges, provided that lenders engage in prudent practices.
Why this story matters:
- The insights from a key insider in private equity raise alarm about the health of the software sector amid rising AI technologies.
Key takeaway:
- Inaccurate valuations in private equity could lead to significant losses for lenders, particularly those focused on software.
Opposing viewpoint:
- Some industry leaders assert that the core performance of software companies remains strong despite market fluctuations, emphasizing resilience in the sector.
