Apollo Director John Zito Questions Private Equity Software Valuations

that of Apollo John Zito had a first-hand assessment of how private equity firms are valuing their software holdings as shares of comparable public technology companies have plunged: That’s not the case, he said.

Zito, co-chairman of the firm’s giant asset management division and chief credit officer, spoke to clients of investment bank UBS last month in remarks first published by The Wall Street Journal. CNBC confirmed Zito’s comments.

“I literally think all brands are fake,” Zito told customers. “I think private equity brands are fake.”

Investors have been punishing the stocks of public software companies for weeks, fearing that the latest tools from Anthropic and OpenAI could make the companies obsolete. That has fueled concerns that private lenders are relying on outdated valuations of their software loans, sparking a wave of redemptions as investors ask to pull funds from private credit vehicles.

Retail investors withdrew about $10 billion from private credit funds in the first quarter, according to a Financial Times analysis. Amid the scramble, a number of industry leaders sought to calm markets by explaining that the underlying companies are still performing well.

But sophisticated actors, notably JPMorgan Chase are starting to act, by curbing loans to private credit players by reducing the value of software loans.

While Wall Street figures including Jeffrey Gundlach and Mohamed El-Erian have flagged risks in private credit, Zito is among the first in the industry to candidly acknowledge market weakness.

An Apollo spokesperson declined to comment on Zito’s remarks. They come in a difficult context for alternative asset managers, whose shares have been battered this year. Zito and other Apollo executives have sought to distinguish Apollo from other private credit players.

Most of Apollo’s loans are to larger, more stable investment-grade companies, and software represents less than 2% of the company’s total assets under management, Apollo told analysts last month. The company has no exposure to private stakes in software companies, he said.

While Zito’s comments at the UBS event were about private equity valuations, many companies acquired by the industry have also taken out private credit. If loans are distressed, that means equity is also in worse shape, he pointed out.

Zito singled out software companies taken private between 2018 and 2022 – a period of high valuations and low interest rates – as particularly exposed, warning that many of them were of “lower quality” than their larger public rivals.

Zito also said that private lenders, and by extension the investors who back the loans, could suffer heavy losses in the years to come. That’s based on what he said could be the eventual recovery rates on loans made to a small and medium-sized generic software company.

Lenders could recoup “between 20 and 40 cents” on these companies if they are “in the wrong place” in relation to the new AI-focused regime, he said.

While lenders that have focused heavily on the software sector are headed for trouble, Zito said, the broad asset class will withstand the current upheaval.

“If you do stupid, focused things, and you do things you’re not supposed to do in your vehicle,” Zito said, “you’ll probably have a bad end.”