New "Subprime Crisis"? The US PE's "software industry loan exposure" is larger than what financial reports show

The actual loan exposure of the US private credit industry to the software sector may far exceed its disclosed levels.

On February 13, after reviewing thousands of holdings of seven major Business Development Companies (BDCs), Bloomberg found that at least 250 investments, totaling over $9 billion in loans, were not labeled as software industry loans by the lenders, despite these borrowing companies being explicitly identified as software firms by other lenders, private equity sponsors, or the companies themselves.

This classification discrepancy not only makes it difficult for outsiders to accurately gauge the concentration of credit funds in the software industry but also underestimates the market’s vulnerability as AI disrupts traditional software business models. Market observers point out that while this difference may not necessarily indicate intentional concealment, it exposes longstanding issues such as inconsistent reporting standards across the private credit industry, complex fee structures, and excessive valuation discretion.

Raymond James Financial analyst Robert Dodd warned that current classification methods often only cover general software, severely underestimating the industry’s exposure as a business model. This traditional classification system has become ineffective in the AI era.

Currently, loans to the software industry have become the largest single exposure for BDCs. Barclays estimates that software loans account for about 20% of all loans held by BDCs, far above the 13% share in the US leveraged loan market. As software stocks have recently suffered heavy losses and AI startups like Anthropic PBC have launched new tools threatening traditional software services, this large and ambiguous risk exposure has raised investor concerns about a potential “new subprime crisis.”

Hidden Exposure: Redefining “Software Companies”

Bloomberg reviewed disclosure documents from BDCs managed by Sixth Street, Apollo Global Management Inc., Ares Management Corp., Blackstone, Blue Owl Capital Inc., Golub Capital, and HPS Investment Partners, discovering that all these institutions have instances of classifying software companies under other industry categories.

For example, Pricefx proudly markets itself as “the number one leading pricing software” on its website. However, one of its main lenders, Sixth Street Partners, classifies it as a “business services” company rather than a software firm.

Sixth Street states in its filings that it groups investments by end-market, so software is not shown as a separate category, even though it admits many portfolio companies primarily provide software products or services, exposing them to industry-specific downturn risks.

Additionally, Apollo classifies Kaseya, which describes itself as an “IT management software” company, as “professional retail,” while Blackstone and Golub categorize it under the software segment.

Even more, Golub labels Restaurant365, which claims to be a “back-end restaurant system software” provider, as “food products,” placing it alongside Louisiana Fish Fry Mix and Bazooka gum manufacturers; Ares classifies it under software and services holdings.

Barclays strategist Corry Short pointed out that this inconsistency makes it extremely difficult to compare software exposure across the entire market.

Confusing Classification Standards Amplify Risk Assessment Challenges

According to Bloomberg, this classification chaos even exists within the same company.

Blue Owl’s largest publicly listed BDC—Blue Owl Capital Corp.—at least categorizes four companies as “chemicals,” “infrastructure and environmental services,” and “business services,” yet in its tech-focused fund, Blue Owl Technology Finance Corp., these same companies are explicitly labeled as “software.”

A Blue Owl spokesperson explained that each fund has different investment strategies, so industry classifications may vary. Their goal is to provide consistent information to help investors understand risks.

Since private credit loans are typically negotiated privately and lack active trading or a universal pricing benchmark, the labels assigned by fund managers carry extraordinary importance.

Michael Anderson, head of Global Credit Strategy at Citigroup, stated that this increases the responsibility of BDC managers to accurately assess, value, and classify these assets, as these loans are not publicly traded and are not part of broad, independently verifiable indices.

Industry Concentration Concerns Amid AI Disruption

Over the past decade, alternative asset managers have flocked to the software industry attracted by predictable revenue streams.

Apollo President Jim Zelter recently revealed that about 30% of private equity funds have flowed into the sector, with software accounting for roughly 40% of all private credit sponsored by originators.

However, with breakthroughs in AI technology—especially as tools from startups like Anthropic PBC threaten sectors from financial research to real estate services—market anxiety about the future of software businesses has rapidly increased.

The S&P North American Software Index has fallen over 20% this year and has experienced multiple single-day declines exceeding 4% in recent weeks. Analysts believe that as AI reshapes the software industry, private credit managers will face increasingly rigorous scrutiny.

Dodd from Raymond James pointed out that the inconsistent reporting of the same loan by different BDCs creates problems, obscuring the true picture. The AI revolution is fundamentally disrupting software and its business functions, rendering traditional industry classification guidelines obsolete.

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