Apollo Executive John Zito Questions Private Equity Software Valuations

Apollo John Zito gave a blunt assessment of how private equity firms are valuing their software holdings as shares of comparable public technology companies have plunged: Not so, he said.

Zito, co-president of the firm’s giant asset management division and its head of credit, spoke to clients at investment bank UBS last month in comments first published in the Wall Street Journal. CNBC confirmed Zito’s comments.

“I literally think every brand is wrong,” Zito told customers. “I think the private equity brands are wrong.”

For weeks, investors have punished shares of public software companies over fears that the latest tools from Anthropic and OpenAI will make these companies obsolete. This has fueled concerns that private credit lenders have outdated valuations on their software loans, causing a wave of repayments as investors ask to withdraw funds from private credit vehicles.

Retail investors have withdrawn around $10 billion from private credit funds in the first quarter, according to a Financial Times analysis. Amid the stampede, a number of industry leaders have tried to calm markets by explaining that underlying companies are still performing well.

But sophisticated players, including JPMorgan Chase are beginning to act, stopping loans to private credit players by lowering the value of software loans.

While Wall Street figures such as Jeffrey Gundlach and Mohamed El-Erian have pointed out risks in private credit, Zito is among the first within the industry to candidly acknowledge the market’s weakness.

An Apollo spokesperson declined to comment on Zito’s comments. They come amid a difficult backdrop for alternative asset managers, which have seen their shares hit this year. Zito and other Apollo executives have tried to draw a distinction between Apollo and other private credit players.

Most of Apollo’s loans are to larger, more stable, investment-grade-rated companies, and software represents less than 2% of the company’s total assets under management, Apollo told analysts last month. The company has zero exposure to private equity stakes in software companies, he said.

While Zito’s comments at the UBS event referred to private equity valuations, many of the companies bought by the industry also obtained private credit loans. If the loans are in trouble, that means the equity is also in worse shape, he said.

Zito highlighted software companies that went private between 2018 and 2022 (a period of high valuations and low interest rates) as particularly exposed, warning that many were of “lower quality” than larger public competitors.

Zito also said that private credit lenders, and by extension the investors backing the loans, could suffer large losses in the coming years. That’s based on what he says could be the eventual recovery rates on loans to a generic small to medium-sized software company.

Lenders could recover “between 20 and 40 cents” on those companies if they are “in the wrong place” in terms of the new AI-led regime, he said.

While lenders that primarily focused on the software sector face problems, in Zito’s view, the overall asset class will withstand the current turmoil.

“If you do stupid things and you do concentrated things, and you do things you’re not supposed to do in your vehicle,” Zito said, “you’re probably going to have a bad end.”