Apollo's John Zito questions private equity's software valuations: 'All the marks are wrong'

20–40 cents on the dollar: Apollo exec John Zito warned that private equity firms are broadly misstating software valuations, saying 'all the marks are wrong.' He estimated lenders to smaller software companies could recover only 20–40c on the dollar, implying potential 60–80% losses and material write-downs for PE-held software assets. This raises sector credit risk, likely forcing markdowns across private software portfolios and increasing strain on lenders/existing debt holders.

Analysis

A broad re-pricing of privately held software is a multi-vector shock: credit holders of subscale SaaS will see realized recoveries materially below prior marks, while public growth software multiples will re-rate as investors re-price future exit liquidity. The direct effect is widening credit spreads and increased stressed M&A supply over the next 3–12 months; the second-order winners are deep-pocketed strategics and distressed credit managers that can buy recurring-revenue assets at single-digit EV/EBITDA or high-teens ARR multiples.

Catalysts and timelines are layered. In days–weeks we should expect loan / CLO spreads and BDC share prices to gap wider on headline-driven risk aversion; over 3–12 months, covenant breaches, restructurings and auctions will create realized loss visibility that either validates a deep markdown cycle or caps losses if strategic buyers step in; over 12–36 months, recovery depends on rate trajectory and corporate buyers’ willingness to pay for scale. A reversal can come quickly if (a) rates fall and refinancing becomes available, or (b) several high-profile corporate buyers aggressively bid, which would restore private marks faster than retail public multiples.

The consensus of blanket impairment is the most actionable misread. Software is heterogeneous: mission-critical, high-retention vertical SaaS with >90% gross margins and NRR >110% are much closer to infrastructure than to churn-prone apps, and will attract strategic capital at premiums. That means a selective, discriminating approach — not a sector-wide short — yields the best asymmetric outcomes: target credit and equity positions around underwriting quality, not headline sector classifications.

Key Decisions for Investors

• Pair trade (3–12 months): Long Oracle (ORCL) or Microsoft (MSFT) vs short Snowflake (SNOW) and Datadog (DDOG) — size the short 60–75% of the long notional to capture multiple compression in pure-play growth names while hedging broader software beta. Target a 20–40% relative spread capture; stop-loss if pair underperforms by 10% to limit macro beta risk.
• Credit short (3–9 months): Buy protection / initiate a put-spread on BDCs / direct-lending vehicles concentrated in small SaaS (e.g., ORCC) — expect 30–50% downside if realizations reset. Keep position size commensurate with portfolio-level credit allowance; exit once CLO/loan market prices imply >30% realized loss assumptions.
• Long distressed managers (6–24 months): Buy Ares Management (ARES) and KKR (KKR) — managers will compound value by buying recurring-revenue assets at distressed multiples and capturing servicing fees. Target 25–40% upside if M&A for distressed SaaS accelerates; risk is fee compression if deal flow evaporates.
• Opportunistic options (9–18 months): Buy deep OTM long-dated puts on select high-multiple SaaS names (e.g., SNOW Jan-2028 puts) sized as convex insurance — low carry, high payoff if sector fire-sale occurs. Use these as tail-hedges (1–2% portfolio) rather than directional core positions.