An aggressive stock market sell-off focused on investors’ fears that AI will disrupt the software industry has spread to some of Wall Street’s biggest money management firms. And their executives have seen enough.
“For those on the call that are thinking Fortune 500 companies are going to take all their software and just rip it out and just say, ‘I’ll just ask ChatGPT,’ that’s simply not the way it works. Don’t take my word for it again. We’re not technologists. Take Jensen Huang’s words for it,” Blue Owl (OWL) co-CEO Marc Lipschultz said on the company’s fourth quarter earnings call Thursday morning.
Blue Owl stock fell about 4% on Thursday following the company’s quarterly results, which reported $300 billion in assets under management for the first time, bringing its losses over the past month to nearly 30%.
“In order for us to have material losses, I can’t describe for you anything fact-based,” Lipschultz added, noting the firm doesn’t see losses stacking up that would result in a “material degradation” in the performance of its funds.
The company added that its exposure to software loans accounts for 8% of its total private credit exposure. About half the company’s assets under management are housed within its private credit platform.
“Of course, I can do it in math,” Lipschultz said. “But there’s no relation to any practical statistic that would lead to anything other than … a lower return for a year, [or] you get a lower return for a couple of years.” The executive added that one would “have to destroy 70% of the value of every one of these software companies” for the current losses being priced in by the market to come to fruition.
UBS strategists warned earlier this week that in an “aggressive disruption” scenario where default rates map to economically stressful times in the past and industry-specific transition periods, private credit loans carry the highest default-rate risk compared to other segments of the credit market.
Blue Owl’s larger rival, Ares Management (ARES), also sought to ease investor fears in its own quarterly report out Thursday.
The Los Angeles-based private lender disclosed that its investment exposure to the software industry represents “less than 9% of its total private credit assets under management.” At Ares, AUM crossed $600 billion in the fourth quarter, with just over $400 billion of that total housed in its credit platform.
“Importantly, not all software exposure is the same,” Ares CEO Michael Arougheti told analysts on Thursday. “We see no change to our earnings growth outlook from AI risks in our existing portfolio, and our business can naturally adapt to the risks and opportunities as they’re presented.”
Ares stock fell as much as 8% on Thursday.
This week, shares of Blue Owl, Ares, and a handful of their alternative investment peers on Wall Street have sold off sharply as part of the market’s software-related drop, including PE giants like Apollo Global Management (APO), Blackstone (BX), and KKR (KKR). (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
Enterprise software companies have become bread-and-butter acquisition or investment targets for many alternative asset managers due to their high profit margins and subscription business models, which generate steady revenue for financial sponsors and lenders.
Over the past decade, private equity firms have taken over 1,900 software companies, according to data compiled by Bloomberg. And equity is far from the only form of capital where many of these same firms have accumulated software exposure. Loans tied to software companies account for roughly 18% of all loans held by a popular private credit fund vehicle known as a business development corporation, or BDC, according to Pitchbook.
With these companies’ stocks caught up in a broad wave of selling, Blue Owl’s Lipschultz drove home this financing distinction on the company’s call.
“The stock equity versus debt is kind of an important starting point, with all this getting conflated,” Lipschultz said. “When we talk about software, we are, on average, around 30% loan to value … [and] since the vintage of those transactions, equity values, on average, are up 23%.”
“We continue to see very healthy portfolios at the end of the day,” Lipschultz said Thursday. “Performance is the ultimate measure, not anecdote.”
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David Hollerith covers the financial sector, ranging from the country’s biggest banks to regional lenders, private equity firms, and the cryptocurrency space.
