00:00Back in 2014, a new technological change happened for oil and gas.
00:05It's called horizontal drilling or fracking.
00:08And that technological change did a couple things.
00:10Number one, it changed the pricing structure for how oil and gas and oil and gas services would work.
00:17And number two, based upon all the capital that was raised,
00:23now all of a sudden capital dried up because the pricing structure collapsed.
00:26And so what we have in software is very similar.
00:31We have a technological change which is forever going to change how software is going to be priced.
00:35Now we should think about that industry.
00:38And based upon that technological change and how much leverage is in the Broadly Syndicated Loan Market
00:43and then more importantly in the direct lending market, leveraging up these software companies,
00:48the capital is now drying up.
00:50And so what did we see as a result of that technological change in oil and gas?
00:56We saw a 15% default rate in the subsequent years, 2016 and 2017.
01:03So for me to say that software, which is the biggest sector within the direct lending business,
01:09couldn't get to a 15% default rate, I think is actually missing the mark
01:14because I think that's exactly what's going to happen in years 27.
01:17And it has a chance of happening in 27 and 28 to have back-to-back years.
01:22So although the industries are very different, there's a lot of similarities because of technology,
01:27technology changing how pricing structure works at a time when too much capital has been flooding into the sector.
01:34Just think about this for a second, Matt.
01:36Only 1% of companies in the U.S. are software companies and only 7% of all publicly listed
01:42companies are software.
01:44Yet, 23% of the direct lending business is software.
01:50How did we get there?
01:51It was a gold rush to finance these software companies and these buyouts.
01:55And the public companies are sitting in good shape because their debt,
01:59when you look at NASDAQ, S&P, Russell 2000, the debt that these software companies have with really good margins,
02:06the debt that they have is only 0.5, less than one turn of leverage.
02:10In the broadly syndicated loan market, you have five turns of leverage, 10 times the leverage.
02:15In the direct lending business, you could have 20 times leverage.
02:18So you don't have the companies that can generate the free cash flow to reposition for AI.
02:22They're in a very tough position.
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