Private credit faces a looming software-driven credit cycle
The private credit sector is highly vulnerable to a looming credit cycle, with mid-market software loans representing a key point of systemic risk.
The argument
The hosts and cited industry figures (Jamie Dimon, Lloyd Blankfein) argued that massive capital inflows have led to sloppy underwriting. Furthermore, because many Business Development Companies (BDCs) hold illiquid software loans, the 60% drawdown in public software equities implies the underlying private assets are worth far less than their stated net asset values.
The thesis, stress-tested
✓ What validates it
- ✓An increase in Chapter 7 or Chapter 11 filings among mid-market software companies
- ✓BDCs forced to write down their Net Asset Values (NAV) to reflect public market comparables
▸ Risks discussed
- ▸The underlying loans are highly illiquid, making true valuation discovery difficult until actual defaults or sales occur
- ▸Retail capital and 401k plans are increasingly exposed, raising regulatory and public sector risks
Hear it yourself
"He said the way the wheels are coming off the car and the equities of private credit managers and the investors who hold them look at LNC today. Public credit looks absurdly rich. This might surprise, but Saba Capital is long stock in BX, Ares, Apollo, and also OWL. We sold down we sold down a lot of CDX high yield at the same time. Okay. So he's hard checking out the credit risk combined the equity."
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