John Zito, co-president of Apollo Global Management's asset management division and head of credit, told UBS clients last month that private equity firms are broadly mispricing the value of software companies taken private, warning that lenders to those deals could suffer material losses.
Zito made the remarks at a UBS event where he said marks applied by private equity to their software holdings appear out of step with declines in comparable public technology shares. He raised concern that a wave of selling in listed software stocks - driven by investor fears that new tools from Anthropic and OpenAI could render incumbent products obsolete - has exposed mismatches between private valuations and current market realities.
The Apollo executive focused his critique on software companies acquired by private equity between 2018 and 2022. He described many of those targets as lower quality than major public peers, noting that the take-private wave occurred during a stretch marked by elevated valuations and low interest rates. Those conditions, he suggested, left some deals vulnerable in the face of changing competitive dynamics.
Zito drew a direct line from overstated private equity marks to the health of private credit loans: many firms bought by private equity also carry private credit financing. If loan collateral is worth less than recorded, Zito warned, the lenders that underwrote those facilities and the investors who back them could face significant losses. He estimated that lenders to a typical small- to medium-sized software company might recover roughly 20 to 40 cents on the dollar if the company is poorly positioned in the emerging AI-led environment.
Those valuation concerns have contributed to investor pressure on both public and private markets. Public software equities have been sold off amid worries over technological obsolescence, and the same valuation disconnects have prompted redemptions from some private credit vehicles as investors seek to withdraw capital tied to potentially outdated marks.
Despite the risks he outlined for lenders focused on software, Zito said he expects the broader private credit asset class to endure the current disruption. He cautioned, however, that managers who concentrate investments outside the intended scope of their funds - effectively stretching mandates - are likely to experience negative outcomes.
Apollo moved to limit any perception that it is heavily exposed to the software segment, stating that software companies account for less than 2% of the firm's assets under management and that the firm reports zero exposure to private equity stakes in software businesses.
Context and implications
- Private equity valuations of take-private software companies may not reflect recent market declines in comparable public technology stocks.
- Private credit loans backing those buyouts are at risk if collateral values are overstated, potentially prompting recoveries in the 20 to 40 cent range on the dollar for some lenders.
- Apollo says its own direct exposure to private equity software stakes is negligible, representing under 2% of assets under management.