Sitting down with Alternative Credit Investor, Mathew Cestar (pictured), president of $20bn Arini, discusses the fallout from the so-called “SaaSpocalypse” of private debt and why Europe has not emerged unscathed.
The high exposure of private debt to software companies is “not only a US issue, but also a European issue,” said Mathew Cestar, president of another asset manager Arini.
Earlier this year, the so-called “SaaSpocalypse” rocked the markets after Artificial Intelligence (AI) developer Anthropic unveiled tools that raised questions about the future of software. The fallout spread to private debt, when lenders found heavy exposure to software companies, triggering a sell-off of US-listed vehicles, including those owned by Apollo, Ares, KKR and TPG.
The trend is still hitting some business development companies at the time of writing, almost five months later.
In the past few months, many in the industry have argued that the problem of software concentration is primarily a problem for the US private market, while Europe is less exposed because software and technology make up a smaller part of the economic activity than in the US.
Read more: Executives are hunting for software winners and losers amid the AI scare
Sitting down with Another Debt Investor, Cestar acknowledges that the US private equity market is highly exposed to this sector, with 30–50 percent of the market in software or software-related loans.
However, he cautions that although the European economy is driven by very different factors to the US, it does not mean that the private debt market on the continent is not also heavily exposed to software.
In fact, the opposite: European lenders saw the success of the strategy and wanted a piece.
“The European economy is driven by very different factors, with software representing a lower proportion of economic activity than the US,” Cestar said. ACI. “Furthermore, due to the seemingly attractive features of the software, many private credit managers in Europe are heavily involved in software.
“So, it’s not just a US problem, it’s also a problem in Europe.”
After the global financial crisis, US regulators discouraged banks from lending high capital, which pushed a lot of software-related funding out of the hands of traditional banks and private credit markets, helping to fuel the sector’s growth among senior figures, Cestar explained.
Overall, this has made the software space “one of the most successful strategies in private equity… and debt is a secondary derivative of that”. “That’s why the representation of software has grown so quickly in the private market.”
At Arini, which oversees £20.03bn (£15.1bn) of assets, Cestar says another manager is always clear of software companies.
“Our view is that if you have one sector that makes up 30–50 percent of your exposure, it’s too concentrated,” he says. “These loans also have the value of being perfect, as they are considered very risky.”
Even without the future of software being affected by AI disruption, this focus on software and its pricing is likely to catch up with the industry at some point, Cestar said.
“What’s happened lately is the anxiety around AI, but it could be anything really, if you price perfection,” he says.
Read more: Private credit could get a ‘boost’ with higher rates despite software concerns
Looking ahead, Cestar says it’s too early to say where AI disruption will hit software companies, and the industry is “still trying to figure out which business models will stick”.
However, recent events have marked a turning point. Cestar explains that for some time you could not distinguish between the managers. They were all lending at the same rates and with the same rating standards.
So, what you will see now is the real difference between the managers, both in the US and in Europe, he says. Those who did strong credit work and those who did not also have a strong industry focus.
“On the negative side it’s a shakeup; on the other hand it’s a real incentive to continue to institutionalize this market”.
Arini’s investment focus is on financing mid-sized companies, which Cestar says is a space that is “unrelated” to other risk profiles found in institutional portfolios.
“Most institutional investors have exposure to the private equity space and increasingly to the debt market, but a lot of that tends to be very senior and sponsor-driven,” he explains.
“A lot of players in Europe tend to be mediocre and this market doesn’t reward mediocre talent.”
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