00:00The risks are sort of piling up for this market. Let's just start off with the Mideast. At least
00:04for right now, investors seem to be taking into stride. The idea here that this might be short
00:09lived or at least it won't necessarily be sort of a broad based effect on the economy. I mean,
00:14what are you hearing from your clients? Are they worried about this specific situation?
00:18Yeah, I mean, I think we move. Right. So we had a really nice backdrop in 2025 where the narrative
00:23was really focused on AI growth. And this year, that narrative has had to compete with troubles
00:28in private credit and the war in Iran more recently. With respect to the war in Iran,
00:33it's really hard to play geopolitics. It's hard to know what's going on with the leader in Iran,
00:39if the leader in Iran is alive at the moment, what the current administration in the U.S. is going
00:44to
00:44do. And so we're telling investors to stay the course, that in all likelihood, this will hopefully
00:52end soon and things will go back to normal. We do anticipate that there will continue to be some
00:58elevated geopolitical risk. This has been something that's been growing for some time. But overall,
01:03we recommend a total portfolio approach and not playing the noise around geopolitics. Well, there
01:08is sort of, I guess, a fog, if you will, with regards to the war. There's also a fog over
01:12some of the
01:12other things that you were talking about, particularly in the private credit sector. Let's just call it
01:17private markets overall. This idea that everyone's trying to figure out what the true marks are.
01:21There's obviously a liquidity issue going on right now with a lot of investors looking for the door.
01:25Is this a crisis or is this just still right now a matter of liquidity?
01:31You know, it's a matter of liquidity. I wouldn't call it a crisis, but I definitely think that there's
01:38going to be some winners and losers. So far, everything's really been focused on what's
01:43been happening in direct lending. So everybody calls it private credit. Private credit has multiple
01:49segments. The issue is really right now focused on direct lending, corporate cash flow lending,
01:55specifically. And there had been a really big buildup in the assets in that space. And the
02:01managers of those of those direct lending funds were looking for resiliency. And so they overweighted
02:07private excuse me, the overweighted software and a lot of those portfolios. And now there's a threat to
02:13software. But is there a threat or issue around some of these businesses that maybe were marked software
02:18before? And now all of a sudden, we're rethinking it. Actually, it's a health care company was never
02:22software to begin with. Is that what's going on behind the scenes?
02:25Well, I mean, I think just at a base level, software is is more than 20 percent of private credit
02:32broadly
02:32or direct lending broadly. And I think if you're going to phrase it that way, it's probably going to be
02:38more where you can recategorize companies depending on where they are. And the issue is really that
02:45when software, there was a period where software was believed to be the golden goose. And so you
02:51could buy companies at sky high multiples of earnings or even worse, buying them at a multiple
02:57of ARR, annual recurring revenue, with the idea that they were going to grow into the multiple,
03:02that all of a sudden you could cut costs, you could cut your sales budget, you built your software.
03:06And there was a really strong moat around these businesses. And AI is challenging that whole
03:12narrative as we speak. But is the big concern that those businesses ultimately are marked down to
03:17zero? I'm just thinking through the actual threat of AI implementation, software presumably is not
03:21going to all go the way of the dinosaurs. But at the same time, if you're over levered and your
03:26ARR is
03:26slowing, something has to give. That's exactly right. I mean, I think you're going to see I think
03:31you're going to see all iterations of what happens. I think there's some companies that are going to be
03:36marked to zero. There's going to be some companies that are fine. And then there's going to be some
03:40companies that actually benefit. And so it's really important to understand what each manager
03:46owns and what the manager paid for those companies when they entered those loans, because you're going
03:52to see a lot of variability around what happens. There are some companies that are going to win
03:57from AI, but there's going to be companies that don't. There's going to be companies that are
04:02disrupted. And if you paid too much for those companies to begin with, not only is it going to
04:07hurt the equity investor. Private equity is, of course, impacted by this, but it could go all the way
04:11down to the private credit angle as well. I am curious. So when you look at the broad software space
04:16and both in the private markets as well as some of the bigger public companies, is there a size
04:20advantage? Because when we talk about sort of the potential for AI disruption, it seems a lot of people
04:24are focusing on kind of the midsize and maybe even the smaller software names. But should we be worried at
04:29all about some of those larger names that maybe their days are not done, certainly may be diminished?
04:34Yeah, I mean, I think in the public markets, you've already started to see some differentiation
04:39between those companies that are expected to benefit and then those companies that are lower
04:44quality. I'd say by and large, though, for the companies that have been able to go public,
04:50those larger companies, those are generally presumed to be higher quality. Once you enter middle
04:55market and lower middle market, those are earlier stage companies, and they're more susceptible to
05:01disruption, I'd say broadly speaking, than what you see on the public side. Do you trust any of the
05:06marks that we've seen so far? You know, first of all, there is a lot that can be done when
05:13you're
05:13marking the book. There's no set standards. So you have to be very, very careful around the marks.
05:19The other thing, though, is that the AI disruption story is still early. So if you're still getting the
05:27cash flows from these companies, it doesn't necessarily mean that the company is going to be marked down
05:34right away. It doesn't mean that the loan is impaired today. What you saw is that in the publicly traded
05:41BDCs, the market started to anticipate that software companies would be vulnerable. And you saw these
05:46companies trade off in the private BDCs. Yeah, that's where the liquidity issues lie.
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