How alternative asset managers are easing software fears

Key Concepts

• Private Credit: Non-bank lending to companies, often involving higher yields and less regulation than traditional bank loans.
• AI Disruption: The potential for Artificial Intelligence to negatively impact existing software companies and business models.
• Digital Infrastructure: The physical and technological foundations necessary for digital technologies, particularly data centers.
• GDP Stakes (Growth Debt Products): Investments linked to the revenue growth of companies, often used as an alternative financing method.
• Indirect Exposure: Risk stemming from investments that aren’t directly in software but could be affected by AI disruption.
• Whipsawed: Rapid and volatile price swings in a market or stock.

Market Reaction to AI Concerns & Private Credit Firm Responses

The Bank of America Global Research Financial Services Conference in Miami saw significant discussion surrounding the recent sell-off impacting alternative asset managers, particularly those involved in private credit. This downturn stems from investor concerns regarding exposure to the software sector and the potential for disruption caused by Artificial Intelligence (AI). Despite initial anxieties, executives from firms like Ares, Blackstone, KKR, and Blue Owl are attempting to reassure the market about their limited direct exposure and strategic positioning.

Executive Perspectives on Software Exposure & AI

Ares CEO Michael Arrighgetti expressed surprise at the market’s reaction to AI disruption, stating, “It is quite odd to us that the public markets have woken up to AI disruption as a theme. You know, if you've been investing over the last five plus years and you haven't been thinking about opportunities and risks created from technology and AI implementation, you've probably been asleep at the switch.” This suggests a belief that sophisticated investors should have already factored AI risks into their valuations.

Blackstone CFO Michael Chase argued that the indiscriminate selling of software stocks indicates an overreaction, noting, “Whenever you see such, quote, indiscriminate and very technical trading against a whole sector, if you, as you have seen with software stocks, that almost definitely means it's being overdone.” This implies a potential buying opportunity for those who believe the market has overcorrected.

KKR CFO Rob Lewin highlighted the difficulty in quickly reassessing portfolio risk due to the rapidly evolving nature of AI, stating they haven’t “gone and re-underwritten their software exposure” because it’s “too quick to kind of make those underwriting decisions…over the course of a week.” He acknowledged the potential for both negative and positive impacts of AI on software companies within their portfolio.

The Digital Infrastructure Hedge & Indirect Exposure Concerns

Executives, particularly Blue Owl Co-CEO Doug Ostrager, emphasized their bullish outlook on digital infrastructure as a hedge against potential software disruption. The logic is that if AI disintermediates software, the demand for the infrastructure supporting AI (like data centers) will increase, potentially offsetting losses. Ostrager expressed “super bullish” sentiments regarding their digital infrastructure exposure.

However, the market remains concerned about indirect exposure to AI disruption. While direct exposure to software through private equity and private credit is reportedly less than 10% across firms, concerns extend to:

• GDP Stakes: Investments tied to revenue growth, which could be negatively impacted by AI-driven competition.
• Other Financing Arrangements: Various financing structures that may carry hidden exposure to vulnerable sectors.
• Non-Traditional Software Categories: Companies not explicitly categorized as “software” but still susceptible to AI-driven disruption.

Broader Market Concerns & Shifting Tides

The discussion also touched upon broader concerns about the sustainability of the private credit boom. The reporter noted a worry that “the tide might be shifting underneath these firms,” given their significant role in financing data center build-outs and the overall asset-raising boom in private credit. This suggests a potential cyclical downturn in the private credit market.

Data & Statistics

• Double-Digit Decline: Publicly traded alternative asset managers have experienced a decline of over 10% in their stock prices over the past month.
• Less than 10% Direct Exposure: Most executives reported direct exposure to software through private equity and private credit to be less than 10% of their respective portfolios.

Logical Connections

The conversation flows from the initial market reaction to AI concerns, through the responses of key executives, and then delves into the complexities of assessing risk – both direct and indirect. The discussion highlights the interplay between software and digital infrastructure, framing the latter as a potential hedge against the former. The concluding remarks acknowledge the broader market anxieties surrounding the private credit sector's growth trajectory.

Conclusion

The financial services conference revealed a concerted effort by private credit firms to downplay concerns about AI disruption and emphasize their strategic positioning in digital infrastructure. While direct exposure to software appears limited, the market remains wary of indirect risks and the potential for a broader shift in the private credit landscape. The volatility in stock prices suggests a lack of full confidence in the firms’ narratives and a continued uncertainty surrounding the long-term impact of AI on the alternative asset management industry.