Software loans?
I know we had a lot of discussions on this forum about software PE, where the outlook seems pretty negative. Can some of the PE software investors comment on software loans? Should people worry about impairment there too or are they covered because they are more senior? Any difference in qualities between PC loan vs BSL loan in software? I’m relatively new to the industry (ignore title, ibd year 2) and debating on offers in credit - is it good to be a software loan analyst going forward? Would it make the software loan analyst more valuable b/c more hairy situations to analyze? Asking for understanding taking a BSL loan job for software. Thanks!
PC is by far the worst place to invest in software. Buyouts is pretty bad too. AI means there will be more variance in outcomes; some of the incumbents that you are lending to will just get displaced fundamentally by AI and go to zero. On the flip side, others will probably adapt AI and grow faster than underwritten (already seeing this in some of the growth/veture companies that we bank), but as a lender you aren't really getting to particpate in the upside there. I think the whole software is dead view is too blunt-edged of an approach, but PC is probably the single worst seat to do software investing.
Thank you! How about software BSL? Any difference there? Appreciate your view!
No one is going to give to be able to give you a great answer on the software part of this TBH, the future of the software industry is too uncertain, but some thoughts:
It is a big sector with a lot of dispersion currently so you would be getting a ton of reps. Even if things go poorly for the sector, someone will have to cover these loans. I think it is likely a good seat for that reason but it will be a lot of pressure to step into covering software loans right now
Given that this is your first buy-side seat, I don't think the sector exposure is that big of a deal (if you were a senior analyst moving into covering software permanently it might be a different story)
To answer this question ("Any difference in qualities between PC loan vs BSL loan in software?"), they probably look very similar in terms of leverage, LTVs, coverage ratios, etc., but I would guess the typical PC credit is smaller than BSL in terms of rev/EBITDA/etc
What are your other opportunities looking like?
You should be very careful about what credit firm you go to work for. If the offer is from Blue Owl, probably best to roll the dice again.
The issue with most PC vehicles are that they are backlevered. They were built for 0 losses. If you have a 5% loss ratio, that’s over 10% on a 60% backleveraged vehicle.
Further, some of the GPs have come out and talked about how they have a big equity cushion, but if the original deal was 30% LTV and the multiples in the sector have compressed by 1/2 then that’s 60% LTV. If the public multiples have compressed by 1/2, that means the median SW PE deal has compressed by more than 50% because PE almost definitionally buys lower quality businesses. Finally, most of these companies don’t actually generate enough cash to pay down the loan. So you have to ask who is going to refinance this stuff, what will the market rate be at the time for this asset, what does that imply for the valuation? What might the PE GP do to screw you over to show their LPs they care about protecting their capital?
It starts looking RE esque (in a bad way) when put like this. LTV at "purchase" looks fine until you realize the company/property is worth 30% less than what they paid 2-3 years ago and things are not getting any better.
PC is a textbook case of finance jumping on an opportunity that made a ton of sense early on (banks ran from any sort of lending post GFC) that grew into a giant bubble of bull shit as too much money flooded the space and it got financed to death (leverage on leverage, ridiculous structuring, fees, etc.).
Thank you! Sorry I’m not familiar with RE. Can you expand on this point please? How are they similar now? Thanks!
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