By Medha Singh, Naomi Rovnick and Isla Binnie
Feb 6 (Reuters) – Asset managers and private equity firms found themselves at the sharp end of the AI‑driven shock hitting the software sector as investors fretted over exposure to loans and leverage tied to the industry.
The pullback in software – which has wiped out nearly $1 trillion in market capitalization in those stocks – impacted asset managers, with the group as a whole hurt. The Dow Jones US Asset Managers Index is down nearly 5% for the week as of Friday afternoon versus the S&P 500 which is around flat.
Individual names that sold off included Ares, Blackstone, Blue Owl, Carlyle, Apollo, TPG and KKR, which fell between 7% and 14% this week – recovering some ground in a rebound on Friday.
“There are a few issues compounding the drawdown,” said Mark Hackett, Nationwide chief market strategist in Philadelphia. “The trigger for the (private equity/business development corporation/asset management) stocks is driven by the software selloff and concern over loan exposure and leverage.”
Morgan Stanley pegged technology services deal volumes at nearly 21% of overall private-equity activity, noting that TPG Inc, Carlyle and KKR were slightly above that level, while Apollo was the lowest among the asset managers in its coverage.
The AI trade had “subsumed parts of the market,” said Wasif Latif, chief investment officer at Sarmaya Partners in New Jersey. “This is especially true for asset managers and PE (private equity) firms.”
With software stocks down 22% since January, loan-to-enterprise value (LTV) has increased for associated credits, raising concerns around default risk, BNP Paribas analysts Meghan Robson and Ben Cannon said in a note. LTV measures total debt against a company’s total valuation.
Software and services exposure is significantly larger in U.S. leveraged loans, around 17%, and 4% in the U.S. high yield loan market, the note said.
In the private credit space, software exposure is about 20%, BNP estimated based on quarterly filings of specialized investment firms known as BDCs.
LENDING EXPOSURE
The non-bank lending sector, which includes private credit funds and esoteric vehicles such as collateralised loan obligations, has also become exposed to the software groups’ declining growth and credit quality.
Software borrowers are the biggest exposure for private lenders and the most highly indebted, while their revenue growth is also slowing, data from alternative credit analysis group KBRA published February 5 showed.
With sales growth down to 10% from 18% a year ago because of factors including companies’ delaying or cutting IT spending, private credit’s software borrowers are also shouldering debt worth 7.4 times much as their profits measured before tax, interest and other deductions, on average, KBRA data showed. This compared to 5.9 times average leverage across a more than $1 trillion pool of loans studied by KBRA.
One banker who works with asset management, who declined to be named, said alternative asset managers will face a test when they look to exit some investments, particularly in software.
Managers of business development companies (BDCs), a key vehicle in private credit through which a fund raises money from investors to then lend directly to mid-sized companies, have been quizzed about software holdings.
Ares executive Kort Schnabel said on a conference call on Wednesday that its business development company, Ares Capital Corporation, had “a very small amount of portfolio companies that could be disrupted.” KKR Co-CEO Scott Nuttall told analysts on a conference call on Thursday that the firm had taken “an inventory of our portfolio the last two years” and identified whether AI was “an opportunity, or a threat, or a question mark.”
Blue Owl said its software portfolio represents 8% of total assets under management as it played down concerns following this week’s selloff, while Carlyle said software accounted for 6% of its AUM.
Speaking at a conference last week before the sell-off took hold, Blackstone President and Chief Operating Officer Jon Gray said AI disruption risk was “top of the page” for his firm, which manages assets worth $1.27 trillion. He said the safest way to play the AI megatrend was investing in data centers and surrounding infrastructure.
Apollo declined to comment ahead of its quarterly results on Monday, while Blackstone and Blue Owl did not respond to Reuters’ requests for comment.
(Reporting by Medha Singh in Bengaluru, Chibuike Oguh, Isla Binnie, Saeed Azhar in New York, Amy-Jo Crowley and Naomi Rovnick in London; additional reporting by Avinash P, Editing by Megan Davies, Anousha Sakoui and Nick Zieminski)
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