Private credit has dominated the headlines this week as concerns over investment quality reach a boiling point.
Recent product releases from AI research labs like Anthropic have reignited questions around the go-forward viability of legacy software products. That’s an issue for private credit because of SaaS portfolio concentration after years of heavy lending to the sector.
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Apollo President Jim Zelter said earlier this month that he estimated that roughly 40 percent of all sponsor-backed private credit went into the sector (and around 30 percent of private equity committed capital). Barclays estimates software is now the largest single exposure of all BDC loan holdings at around 20 percent, versus just 13 percent in the broadly syndicated leveraged loan market, per Morningstar.
True exposure could be even greater.
A Bloomberg News review of thousands of holdings across seven major BDCs found that at least 250 investments worth more than $9 billion were not labeled as software loans by one or more lenders, even though the borrowers describe themselves that way, their sponsors describe them that way, or other lenders in the same credit classify them that way.
Apollo categorizes Kaseya, a self-described “IT management software” company, as “specialty retail.” Golub Capital categorizes Restaurant365, which calls itself a “back-office restaurant system software” provider, under “food products,” alongside Louisiana Fish Fry and the maker of Bazooka Bubble Gum. Sixth Street Partners classifies Pricefx, whose homepage uses the word “software” more than a dozen times, as a “business services” company.
Investor jitters first hit Blue Owl last month with a wave of redemptions, eventually forcing the firm to halt exits from one of its funds and sell off assets to boost liquidity levels. That’s led to fears of contagion, with Ares, Blackstone, and Apollo now all managing through a period of heightened withdrawals across their semi-liquid vehicles.
Blackstone’s $82 billion Private Credit Fund faced a record redemption request of roughly $3.8 billion last quarter, or around 7.9 percent of net assets. To meet the request without altering the terms of its tender offer, Blackstone allocated $250 million of firm capital and collected $150 million of personal contributions from more than 25 senior leaders across the business, according to people familiar with the matter.
As BDCs prepare to meet the coming redemption requests, managers face decisions on how best to navigate the situation. Outside of Blue Owl, no other perpetual fund has formally gated withdrawals yet, and no one wants to be the first.
Adding more intrigue to the brewing mess, the escalating conflict in Iran could move things in either direction, depending on who you ask.
While geopolitical concerns likely mean a halt to dealmaking, some see a boost to the relative value of private credit. Volatile financial markets and borrower uncertainty could mean that relationship-based bespoke financing solutions offered by direct lenders are now more important than ever.
Either way, there seems to be growing consensus that the asset class is due for some level of reset.
“We’re going to have a correction, but it’s no different than the correction that’s happening in banking,” Rowan said at Bloomberg Invest. “There’s always going to be fraud. There’s always going to be underwriting mistakes. But the question is who’s a good risk manager and who’s not a good risk manager?”