Apollo exec John Zito questions private equity software valuations

of Apollo John Zito He offered a clear assessment of how private equity firms are valuing software assets while shares of similar public technology companies are falling: Not, he said.

Zito, co-head of the firm’s giant asset management division, and head of creditspoke to clients of investment bank UBS for the first time last month It was published Wall Street Journal article. CNBC confirmed Zito’s comments.

“I really think all the signs are wrong,” Zito told customers. “I think private equity brands are wrong.”

Investors have punished shares of public software companies for weeks out of fear that Anthropic and OpenAI’s newest tools would make those companies obsolete. This fueled concerns that private lenders were holding on to outdated valuations of software loans and sparked a wave of repayments as investors sought to withdraw funds from private lending vehicles.

Retail investors took action 10 billion dollars from private credit funds in the first quarter, according to analysis by the Financial Times. Amid the stampede, a number of industry leaders attempted to calm markets by announcing that underlying companies were still performing well.

But sophisticated players also include JPMorgan Chase They are starting to take action to rein in loans to private credit players by reducing the value of software loans.

Including Wall Street figures Jeffrey Gundlach and Mohamed El-Erian Zito, who has flagged risks in private loans, is among the first from the industry to candidly acknowledge market weakness.

An Apollo spokesman declined to comment on Zito’s remarks. They come amid a challenging environment for alternative asset managers, who have seen their shares take a beating this year. Zito and other Apollo executives have tried to draw a distinction between Apollo and other players in the private lending space.

Many of Apollo’s loans are made to larger, more stable companies and are considered investment grade, and the software makes up for it. less than 2% Apollo told analysts last month that the firm had 100 percent of its total assets under management. The firm has zero exposure to private equity stakes in software companies, it said.

While Zito’s comments at the UBS event were about valuations in private equity, many companies acquired by the sector also used private equity loans. He stated that the fact that loans are in trouble means that equity capital is also in bad shape.

Zito noted that software companies that were privatized between 2018 and 2022 (a period of high valuations and low interest rates) were particularly exposed, warning that many were “lower quality” than larger publicly traded competitors.

Zito also said private lenders and, by extension, investors backing the loans could see deep losses in the coming years. That’s based on what it says might be the ultimate recovery rates for loans made to a small-to-medium-sized software firm.

He said lenders could get “somewhere between 20 and 40 cents” of compensation from these companies if they were “in the wrong place” for the new AI-led regime.

While lenders According to Zito, assets focused heavily on the software sector are headed for trouble, while the broad asset class will endure the current turmoil.