Apollo Global Management sign in New York, December 5, 2023.
Gina Moon | Bloomberg | Getty Images
Apollo’s John Zito has given a frank assessment of how private equity firms are valuing their software holdings, saying, “Not really.” As the share prices of comparable publicly traded technology companies plummet, he says, “Not really.”
Zito, co-president and head of credit at the firm’s giant asset management division, told clients of investment bank UBS last month in remarks first published in the Wall Street Journal. CNBC confirmed Zito’s comments.
“I think literally every mark is wrong,” Zito told his customers. “I think the private equity mark is wrong.”
Investors have been punishing stocks of public software companies for weeks over concerns that the latest tools from Anthropic and OpenAI will make them obsolete. This has raised concerns that private credit lenders are leaving behind outdated valuations on their software loans, creating a wave of redemptions as investors seek to withdraw funds from private credit vehicles.
Retail investors withdrew about $10 billion from private credit funds in the first quarter, according to a Financial Times analysis. Amid the turmoil, a series of industry leaders have tried to calm the market by explaining that underlying company performance remains strong.
But a sophisticated player like JP Morgan Chase It has begun to take action, including curbing lending to private credit players by lowering the value of software loans.
While Wall Street luminaries such as Jeffrey Gundlach and Mohamed El-Erian have warned of the risks to private credit, Zito was one of the first in the industry to openly acknowledge market weakness.
An Apollo spokesperson declined to comment on Zito’s remarks. It comes in a tough environment for alternative asset managers, where stock prices have been in tatters this year. Mr. Zito and other Apollo executives have sought to distinguish Apollo from other players in terms of personal credit.
Most of Apollo’s loans are to larger, more stable companies rated investment grade, and software accounts for less than 2% of the company’s total assets under management, Apollo told analysts last month. The company says it has zero exposure to private equity in software companies.
“Bad End”
Zito’s comments at the UBS event were about private equity valuations, but many of the companies acquired by the industry also used private credit loans. He pointed out that if financing becomes difficult, it means that the capital position also deteriorates.
Zito cited software companies that were taken private between 2018 and 2022 (a period of high valuations and low interest rates) as particularly exposed, and warned that many were of “lower quality” than their larger publicly traded competitors.
Mr. Zito also said that private credit lenders, and by extension the investors who back the loans, could suffer heavy losses in the coming years. This is based on what he said could be the ultimate recovery rate for a loan to a typical small to medium-sized software company.
Lenders could recover “between 20 cents and 40 cents” from these companies if they end up in the “wrong position” regarding the new AI-driven regime, he said.
While financiers focused on the software sector are facing challenges, in Zito’s view a wide range of asset classes will be able to withstand the current turmoil.
“If you do something stupid, if you don’t concentrate, if you do something you shouldn’t do in a car, you’re probably going to end up bad,” Zito said.
