Apollo Signals caution: Private Credit Giant Reduces Software Loan Exposure Amid AI Disruption Fears
New York, NY – apollo Global Management, one of the world’s largest choice investment firms with over $900 billion in assets under management, has substantially reduced its exposure to the software sector, signaling growing concern over the potential for artificial intelligence (AI) to disrupt the industry. This strategic shift, revealed through sources familiar with the firm’s internal decisions, reflects a broader anxiety within the private capital market regarding the future of software valuations and the risks posed by rapidly evolving AI technologies.
For over a decade, private equity and credit firms have aggressively invested in software companies, drawn by their recurring revenue models and high operating margins. This fueled a boom in leveraged buyouts, particularly in 2020 and 2021, resulting in significant industry exposure – with manny of the largest private credit funds now holding 25-33% of their assets in software.However, Apollo’s recent actions suggest a reassessment of this strategy.
Betting Against the Sector – and Why
Throughout much of 2024, Apollo took short positions on loans tied to software companies owned by prominent private equity firms including KKR (Internet brands), Francisco Partners (SonicWall), and Clearlake (Perforce). While these short bets have since been closed, the move underscores a fundamental concern: AI’s potential to automate core functions within enterprise software, impacting the value proposition of numerous businesses.
“Technology change is going to cause massive dislocation in the credit market,” stated Apollo’s CEO, Marc Rowan, at a recent industry conference. “I don’t know whether that’s going to be enterprise software, which could… benefit or be destroyed by this. As a lender, I’m not sure I want to be there to find out.”
This sentiment highlights a key risk for lenders: the difficulty in accurately assessing the long-term viability of software companies in a landscape rapidly reshaped by AI. AI’s ability to automate tasks traditionally performed by coders, customer service representatives, and financial professionals directly threatens the revenue streams of many software providers.
A Measured Reduction, Not a Panic
While Apollo’s short positions represented less than 1% of its $700 billion credit portfolio – and were partially used as hedges – the firm has embarked on a more substantial, systematic reduction in its overall software lending commitments. Entering 2025 with approximately 20% exposure to software within its private credit funds, apollo aims to reduce this concentration to below 10% of net assets. This is being achieved through a rigorous internal review of software companies, evaluating their vulnerability to AI-driven disruption.
Importantly, the market hasn’t yet reflected widespread panic. The loans Apollo shorted have largely recovered, currently trading above 80 cents on the dollar, suggesting limited immediate distress. However, Apollo’s proactive approach suggests a long-term view, anticipating potential challenges as AI adoption accelerates.
Blackstone Echoes Concerns: Industry-Wide Awareness
Apollo isn’t alone in its cautious outlook. Jonathan Gray, President of Blackstone, publicly acknowledged the underestimated disruptive potential of AI at a Financial Times conference in October. He mandated that all investment memos include a detailed assessment of AI risks, particularly for “rules-based businesses” like legal, accounting, and transaction processing.
“We’ve told our credit and equity teams: address AI on the first pages of your investment memos,” Gray stated. “If you think about rules-based businesses… this is going to be profound.”
A Shift in Lending Landscape
The current situation represents a notable departure from the early 2010s, when software companies were largely excluded from traditional Wall Street lending due to a lack of tangible assets. The rise of subscription-based revenue and high margins changed this dynamic, leading to a surge in private lending to the sector. However, the combination of inflated valuations during the 2020-2021 buyout boom, rising interest rates, and now, the looming threat of AI, is forcing lenders to re-evaluate their risk tolerance.
Looking Ahead
Apollo’s strategic shift serves as a bellwether for the private capital industry. It underscores the growing recognition that AI isn’t just an possibility for software companies, but a possibly existential threat to many. As AI continues to evolve, expect to see increased scrutiny of software valuations, a more cautious approach to lending, and a greater emphasis on identifying companies that can successfully adapt to the new technological landscape. The era of easy money and rapid growth in the software sector may be coming to an end, replaced by a period of heightened risk and selective investment.
Disclaimer: *I am an AI chatbot and cannot provide financial advice. This
