Shrinking Software Valuations
The Credit Strategist Blog
This graph, borrowed from Societe Generale’s brilliant Albert Edwards, illustrates the sharp drop in software equity values. Perhaps the decline hasn’t yet reached the software loans held in private credit funds (including BDCs and CLOS), but a loss of one-third of the value (on average - every loan is different) suggests that the debt is under pressure and may be impaired in some if not many cases. If fears that AI is going to eat software prove to be true (right now we are just operating on fears that it will), software stocks will drop further and the debt of these companies will be impaired. Investors looking to “buy-the-dip” in this area are going to really need technical expertise to understand the risks involved in owning these stocks. And lenders, who were imprudent lending to asset-lite software companies at high debt multiples with covenant-lite loans, now hold illiquid loans that are difficult if not impossible to sell and will be extremely difficult to refinance at maturity. This is a problem for the software industry, the venture capital industry, and the private equity and private credit industries. And it likely won’t be resolved for a while as we await the development of LLMs and other AI applications over the coming years.