Asset managers and private equity firms have felt the tremors from an AI-driven upheaval affecting the software industry, leading to concerns over loans and leverage associated with these companies. The significant downturn in software stocks, which has resulted in a loss of nearly $1 trillion in market capitalization, has had a cascading effect on asset management firms. The Dow Jones U.S. Asset Managers Index has declined by almost 5% over the past week, contrasting with the S&P 500, which has remained relatively stable.
Prominent firms such as Ares, Blackstone, Blue Owl, Carlyle, Apollo, TPG, and KKR have seen their stock prices drop between 7% and 14% this week, although there was some recovery on Friday. Analysts attribute these declines to multiple factors, with the major driver being the selloff in software stocks. Mark Hackett, chief market strategist at Nationwide, emphasized the compounded nature of the downturn. He noted that concerns regarding loan exposure and leverage within private equity, business development corporations, and asset management firms are significant contributors to the current market anxiety.
Morgan Stanley has reported that technology services account for nearly 21% of overall private equity deals, indicating that firms such as TPG, Carlyle, and KKR are slightly above that average. Conversely, Apollo is noted to have the least exposure among the asset managers covered by Morgan Stanley.
The prevailing trend in AI has “subsumed parts of the market,” according to Wasif Latif, chief investment officer at Sarmaya Partners, particularly impacting asset managers and private equity firms. Software stocks have witnessed a 22% downturn since January, which has elevated loan-to-enterprise value (LTV) ratios and spurred worries about potential defaults, according to analysts from BNP Paribas. Software exposure accounts for approximately 17% of U.S. leveraged loans and about 4% within the high-yield loan market. In the private credit sector, the estimated software exposure is around 20%, based on quarterly disclosures from business development companies (BDCs).
The non-bank lending sector, which includes private credit funds and complex financial instruments like collateralized loan obligations, now faces heightened exposure due to the deteriorating growth and credit qualities of software companies. Data from KBRA indicates that these software borrowers are highly indebted, carrying an average debt load of 7.4 times their earnings before tax, interest, and other deductions. In comparison, average leverage across a broad pool of loans is approximately 5.9 times.
As these firms navigate the challenging landscape, industry experts indicate that alternative asset managers will encounter difficulties when seeking to divest from software-related investments. Ares executive Kort Schnabel revealed that his company’s BDC has a minimal number of portfolio companies potentially affected by market disruptions. Similarly, KKR’s Co-CEO Scott Nuttall mentioned that the firm had conducted an inventory of its portfolio over the past two years to assess the impacts of AI as an opportunity, threat, or uncertainty.
Blue Owl stated that its software portfolio constitutes 8% of its total assets under management, while Carlyle indicated that software represents 6%. Prior to the selloff, Blackstone’s President Jon Gray highlighted that the risks associated with AI disruption were paramount for the firm, which manages assets totaling $1.27 trillion. He suggested that the most prudent approach to the AI revolution is investing in data centers and related infrastructure.
As firms brace for their quarterly earnings reports, Apollo opted not to comment, while Blackstone and Blue Owl did not respond to inquiries regarding their positions.
