00:00So I'm taking a look at the notes that you sent over to our producers, and you say that you
00:04take a look at the years of 2010 to about 2021, and that was really the decade of software in
00:10P.E.
00:10We're in 2026 right now, and I wonder, you know, what you would call this decade.
00:15Yeah, I would say that we are beginning to see what we think of as a pretty healthy mean reversion
00:20of back to basics in private equity.
00:23It's hard to remember this now, but even as recently as the middle of the last decade, you felt like
00:30you risked obsolescence in private equity if your firm wasn't really concentrating capital into software.
00:37And what we saw during that decade was really a massive concentration of private credit and private equity capital in
00:42software transactions.
00:44And investors were really rewarded pretty handsomely for this.
00:48Fifty-five percent of our industry's value creation came from multiple expansion, and much of that was really disproportionately concentrated
00:56in software.
00:58And so that really resulted in a huge amount of concentration of capital, 20 to 30 percent in the latter
01:05half of the decade really going into this one sector.
01:09And what we're seeing now is the beginnings of a pretty big unwind and re-rating of all that capital.
01:16There are signs of real stress.
01:17So public market software valuations are, of course, down 25, 30 percent.
01:21Private equity valuations tend to be stickier, but the first lean loan index of software companies is trading at 88
01:28cents on the dollar.
01:29Twenty-five percent of all liability management exercises are in software deals.
01:33So there are signs of real stress.
01:35What we see, the good news is that we see this as really the beginnings of a retrenchment towards back
01:40to basics private equity.
01:42We were never designed to be a top-down macro asset class.
01:45We're supposed to be investing in middle market companies that were transforming.
01:49And now there's a recognition that over a 50-year period of time, that's really been the most consistent.
01:52Can I just stop you, back you up there?
01:54Because you mean, you talk about, what was it, you said 25 to 30 percent down in valuations.
01:59Okay, but that's not default.
02:00Are you modeling in default rates anywhere near that right now?
02:04Well, the software loan default rate has gone from near zero over a period of a decade to roughly 15
02:10percent.
02:11So the real-world data is informing us that there is actual stress in these companies.
02:17Now, that's not really driven by a decline in performance.
02:20What it's driven by is the unwinding of some of the excesses that happen whenever capital concentrates in an industry.
02:25Excess valuations, inflated earnings definitions, excess leverage multiples.
02:31So what we're seeing is the beginnings of somewhat of an unwind of that process.
02:35Is this creating opportunity for you, though, I mean, in a material way?
02:39Yes, absolutely.
02:40We think that this type of environment leads to, generically, a really fertile opportunity set for middle market investors.
02:48Now, for us, we invest in multiple sectors.
02:51So there is a whole part of our portfolio that we would think of as not really affected by AI
02:57one way or another.
02:57An example of that might be the youth sports industry where we're investing in building a platform.
03:02But in technology specifically, we're starting to see some really interestingly priced opportunities of companies that actually have great growth
03:09prospects in a post-AI world that are now being priced in a much more rational way.
03:13Well, I was going to ask you, you know, if this if what we're seeing in software is a mean
03:17reversion, it's not an extinction event, event, whether or not you would step into maybe some of that.
03:22But it sounds like instead you're just trying to sort of avoid AI altogether.
03:27That's only partially true.
03:29OK.
03:29So we define technology holistically.
03:32What we're seeing right now is a general risk off in technology.
03:35A lot of the large private credit lenders have decided that they just need to manage down the percentage of
03:41their portfolio in technology generally.
03:42What that's meant for us is even if we posit that the exact shape of AI disruption to software businesses
03:48is a little bit imponderable, there's a lot of downstream businesses, network aggregation models, technology service distributors that are actually
03:56really solid business models, not impacted by AI that are being kind of thrown out with the backwater.
04:01Is that part of the tech opportunities fund that you have?
04:03That is part of our overall practice.
04:06That's part of the overall practice.
04:06We would look at good middle market businesses that have those type of technology and market exposures where the AI
04:11risk is either isolated or actually a debt positive to the business model and think about adding those selectively to
04:16our portfolio.
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