AI tests private credit’s software bet: Ares and Man Group
AI is forcing a reckoning for private credit’s huge software bet, with prominent investors telling CNBC that the technology will forge winners and losers, rather than wipe it out in the so-called “SaaSpocalypse.”
Private credit specialists at firms, including Ares and Man Group, told CNBC that AI would force lenders to distinguish between software companies that could adapt and those that would disruption.
When concerns around the “SaaSpocalypse,” or software apocalypse, emerged earlier this year, Ares co-president Blair Jacobsen said the firm took notice —”but it wasn’t a big surprise.”
Jacobsen said the dialog around AI’s impact on companies has shifted since the sharp tech sell-off in February, sparked by fears that AI would make much software obsolete.
Software stocks have since pared losses, with the iShares Expanded Tech-Software Sector ETF surging 21% in May, and advancing 9% on a three-month basis.
“Now there’s a view there will be winners and losers,” said Jacobsen, who was speaking to CNBC’s Annette Weisbach on day two of this year’s SuperReturn International private equity and venture capital conference in Berlin.
“Some companies will be able to adapt to AI, and some will face more challenges. We’ve seen that in loan and bond prices, the equity prices of software in general — there are both opportunities and risks.”
The cost of failure
Jacobsen said that Ares, which has invested in software for more than 15 years, sees opportunity in companies that provide mission-critical services, including enterprise resource planning systems in regulated industries. In those areas, the cost of switching — or failure — can be high, giving stronger software businesses a layer of protection even as AI disrupts the broader market.
“The cost of failure is very high, so again we think we’re going to see more bifurcated outcomes,” Jacobsen said.
“We have been continuing to lend into software, and as a result of the dynamics… spreads are widening, documentation is tightening, loan to values are going down. As a credit investor, that can be a very, very attractive dynamic.”
Private credit has emerged as a major source of capital to the software sector, with alternative lenders’ exposure growing to between 20% and 30% on average over the past five years, said Kevin Marchetti, chief investment officer and head of U.S. direct lending at Man Group.
Ares.
Marchetti said AI now represents a major test of the private credit thesis in software, comparable to the disruptive variables that have challenged other sectors in decades past.
He said Man Group’s focus is increasingly on “old economy” businesses where AI is more likely to enhance operations than upend the business model.
These include “critical b2b healthcare services, distribution companies that are focused in and around serving Main Street, USA, where we fundamentally believe AI can be more of an enabler of those businesses and unlock value going forward, driving better…
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