Apollo exec says private equity software valuations ’all wrong’

20–40 cents: Apollo executive John Zito warned UBS clients that lenders to small‑to‑medium software firms taken private in 2018–2022 could recover only ~20–40¢ on the dollar if AI disruption makes those businesses obsolete. He said private equity marks are likely overstated as public tech comps have fallen, creating redemption and private‑credit losses and heightened sector risk. Apollo emphasized it has <2% of AUM in software and zero exposure to private equity software stakes, but flagged broad downside for concentrated private‑credit portfolios tied to software valuations.

Analysis

The market dislocation in mid‑market software credit is a classic mismatch of liquidity and mark: private lenders and backers hold fairly illiquid claims that will be repriced quickly if redemptions persist, forcing asset sales into thin secondary markets. That creates a two‑speed recovery: public, scale‑advantaged software franchises that can reaccelerate revenue will reprice within quarters, while smaller, cash‑flow‑stressed targets will take 6–24 months of workout, restructuring or fire‑sale M&A to discover true value.

Second‑order winners are buyers of distressed private claims and strategic acquirers with dry powder — these players can acquire customer lists, cloud contracts and recurring revenue streams at deeply discounted multiples, then consolidate economics by cutting sales & R&D. Conversely, sell‑side participants (small BDCs, boutique private credit managers, and warehouse lenders) face acute liquidity and reputational risk; NAV compression combined with fundraising slowdowns will magnify losses beyond headline default rates.

Key catalysts to watch: a sustained rotation back into public software (a 15–25% re‑rating in public comps) or central bank easing would shrink funding spreads and restore marks within 3–9 months; absent that, expect CLO mezzanine and secondaries to remain wide for 9–18 months, giving active distressed managers time to scoop assets but punishing passive/levered holders in the interim.

Key Decisions for Investors

• Buy APO (APO) common — 6–12 month horizon. Rationale: scale, diversified fee streams and balance sheet optionality should outperform smaller private‑credit players during a multi‑quarter revaluation. Position size 2–3% NAV; target +20–30% total return vs downside ~–20% in broad credit shock; stop loss 12%.
• Relative‑value pair: Long MSFT (or another high‑quality AI‑leader) / Short PSCT (Invesco SmallCap Info Tech ETF) — 6–12 month horizon. Rationale: isolates idiosyncratic distress in small/mid software while collecting participation in AI winners. Use 1:1 notional, target 15–30% relative outperformance, risk capped by stop on MSFT if macro equity selloff >15%.
• Short BDC ETF BIZD — 3–6 month tactical trade to capture NAV compression from redemption flows and weak private loan marks. Position small (1–2% NAV), target 20–30% downside; high idiosyncratic risk if markets calm quickly, set tight 8–10% stop.
• Buy PSCT 6–9 month put spread (10–15% OTM) as a limited‑risk tail hedge on small/mid‑cap software exposure. Cost defined; asymmetric payoff if redemptions and covenant resets trigger a sharper drawdown in the segment. Allocate 0.5–1% NAV; breakeven if PSCT falls ~12–15% by expiry.