Apollo Executives Say Private Equity Software Valuations Are "Completely Wrong"

Investing.com - Apollo Global Management executive John Zito told UBS clients last month that private equity firms generally overstate the value of their software holdings and warned that lenders could face significant losses in the sector.

Zito, co-president of Apollo’s asset management division and head of credit, said he believes private equity valuations are inaccurate because the stock prices of comparable publicly traded tech companies have fallen. His comments were first reported by The Wall Street Journal.

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These remarks come as investors are selling off shares of publicly traded software companies, worried that new tools from Anthropic and OpenAI could render existing software obsolete. This has raised questions about whether private credit lenders hold outdated software loan valuations and has triggered a wave of redemptions as investors seek to withdraw from private credit funds.

Zito’s comments at the UBS event focused on private equity valuations, but he noted that many of the acquired companies in the industry also have private credit loans. He stated that if the loans face difficulties, the equity positions will also be affected.

Zito pointed out that software companies that went private between 2018 and 2022 are especially at risk. He described many of these companies as lower quality compared to large publicly traded competitors, a period characterized by high valuations and low interest rates.

The Apollo executive warned that private credit lenders and their investors could suffer significant losses. He said that if these companies are mispositioned in the new AI-driven landscape, lenders providing loans to typical small- and mid-sized software firms might only recover 20 to 40 cents per dollar.

Despite the challenges faced by lenders heavily reliant on the software sector, Zito stated that broader asset classes will survive the current upheaval. He warned that those who concentrate investments outside their expected scope could face a poor outcome.

Apollo is trying to distance itself from potential losses in the software sector, telling analysts that software companies account for less than 2% of the firm’s managed assets. The company also stated that its exposure to private equity holdings in software companies is zero.

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