Introduction#
John Zito, an executive at Apollo Global Management, recently expressed concerns to UBS clients about the accuracy of private equity firms' valuations of their software holdings. He warned that lenders could face significant losses in this sector.
Misleading Valuations#
Zito, who is the co-president of Apollo’s asset management division and head of credit, believes that the valuations assigned to private equity software assets are incorrect. He pointed out that the stock prices of similar public technology companies have fallen, suggesting that private equity firms may not be reflecting this decline in their valuations.
Impact of AI on Software Companies#
His comments come amid a broader sell-off of shares in public software companies, driven by fears that new artificial intelligence tools from companies like Anthropic and OpenAI could render existing software solutions obsolete. This situation raises concerns that private credit lenders may be holding onto outdated valuations of their software-related loans, leading to potential redemptions as investors look to withdraw their funds.
Risks for Lenders#
Zito highlighted that many companies acquired by private equity also rely on private credit loans. If these loans encounter difficulties, it could negatively impact the equity positions of the firms involved. He specifically noted that software companies acquired between 2018 and 2022 may be particularly vulnerable, as they are often of lower quality compared to larger public competitors.
Future Outlook#
Despite the challenges, Zito believes that the broader asset class will endure this disruption. He cautioned that lenders who make concentrated investments outside their intended focus may face adverse outcomes. Apollo has sought to reassure analysts by stating that software companies make up less than 2% of its assets under management and that it has no exposure to private equity stakes in software firms.