From "software doomsday theory" to the shadow of bad debts, private credit and BDC are experiencing a "collective panic sell-off".

This week began with a global stock market crash in the technology sector, rapidly engulfing private credit financial companies that have made large-scale investments and lent to software manufacturers believed to be at risk of artificial intelligence development. Alternative asset management companies, investment banks, and business development companies (BDCs) are all facing severe blows after the launch of the latest AI tool by startup company Anthropic sparked panic, investors are fleeing software stocks, fearful that software giants such as Oracle, Datadog Inc., and FactSet Research Systems Inc. are in danger. The core concern in the market is that these financial institutions may suffer huge losses due to potential massive bad debts shadow related to these software creators. "The sell-off of software stocks has led to the selling of stocks of financial companies, especially leveraged financial companies that hold them," said Mark Hackett, Chief Market Strategist at Nationwide. "The intensity of this sell-off is further amplified by the characteristic of trading being too crowded and long positions exiting." The crash of software stocks is causing a drop in the stock prices of BDCs and private credit financial companies The Nasdaq 100 index, which is dominated by technology stocks, is set to record its worst weekly performance since early April this week when US President Donald Trump's widespread tariffs caused chaos in global markets. This impact has also spread to other sectors of the market, with some areas of the financial sector suffering severe losses. An asset management company benchmark fell more than 6% this week, the Invesco Global Listed Private Equity ETF plummeted over 7%, both poised to record their worst weekly performance since April. At the same time, the VanEck BDC Income ETF fell 5.6% this week, its largest weekly decline since October. As shown above, private credit stocks are following the downturn of the software sector, with asset management companies falling as investors fear bad debt loan losses related to the software industry. "It is very difficult to time the market, and selling based on emotions is rarely a wise move," Hackett said. "But I would encourage investors to review their exposures and ensure they align with their long-term plans." From a credit research perspective, this is more likely to be a leading pricing dominated by "emotional overflow + increasing discount rates" rather than a systemic bad debt wave that has been verified by financial statements: multiple institutions emphasized in their earnings calls that their technology/software loan portfolios are still "high-quality/clean", and Bloomberg Intelligence also pointed out that the impact of AI on software borrowers is difficult to observe in credit data immediately and takes time to materialize. Short-term "turning point indicators" to focus on include: software borrower ARR growth rate and net retention changes, discounts/deal sizes, deteriorating customer concentration, non-accrual loans rising, fund redemption pressures, and frequency of valuation downgrades. On the macro level, the latest LSEG Lipper fund flow data has shown a decline in risk appetite funds flowing out of the technology sector into value-centric, undervalued industrial stocks and metal mining stocks, while bonds and money market funds are attracting funds, indicating a reconfiguration of the market towards "reducing technology and high beta/momentum strategies, steadily increasing defensible/cash flow-oriented assets visibility." In recent years, software has often ranked among the top industries in the exposure of BDCs and private credit funds' top ten industries; when software stocks plummet rapidly, the market immediately worries about two things (1) lagging credit risk: customer losses, price declines, and subscription downgrades will erode EBITDA and cash flow first, then manifest in debt coverage and defaults; (2) financing and exit windows narrowing: rising refinancing costs, slowing mergers/IPOs will reduce the efficiency of private credit's "exit by retreating" strategy. Therefore, investors often first sell leveraged managers/BDCs with significant software loan exposure (such as Blue Owl-related vehicles) and quickly push the risk out through ETFs and secondary market pricing. Alternative asset management company Blue Owl Capital Inc., which initially focused on providing significant financing support for software companies, is currently experiencing the most severe impact in the financial sector due to the sell-off. Its stock has fallen for 11 consecutive trading days, marking its longest consecutive decline since going public in 2021, with a cumulative decline of 26%, and its stock price falling to its lowest level since August 2023. Stocks related to BDCs that aggregate private credit loans have also fallen to multi-year lows. Blue Owl's technology-focused BDC currently trades at its all-time low. "The software sector is often one of the main industry exposures for BDCs," wrote senior analyst Ebrahim Poonawala of Bank of America in a report on February 4. This week, investors have been on edge, awaiting optimistic signals from executives at companies like Blue Owl, KKR & Co., and Ares Management Corp. during performance calls with analysts, trying to alleviate market concerns about their exposure to software on their books. "The technology investment portfolio, biased towards software, remains the most high-quality and clean in all our portfolios," said Blue Owl co-founder Marc Lipschultz in a company earnings call on Thursday. However, the serious problems investors anticipate are unlikely to manifest immediately in profits and portfolios. "The challenge is that the impact of AI on software borrowers is unlikely to be immediately visible in credit assets and will take time to surface," said Bloomberg Intelligence senior analyst Michael Kaye. Software sell-off panic is compounding the misery for a sector already uneasy due to threats from last year's private credit; last week, after a significant increase in investor redemption capacity for a BDC focused on technology and software under Blue Owl, investors withdrew about 15.4% of its net assets from the fund. Meanwhile, a private debt fund under the world's largest asset management giant BlackRock Inc., BlackRock TCP Capital Corp., saw its stock fall by the largest margin in nearly six years after disclosing write-downs on a series of troubled investments. The idea of a "software stock doomsday" is pure exaggeration of investors' panic? However, some professional investors believe that the crash of stocks related to the private credit market has been exaggerated, especially now when it is too early to assess the severity of the impact. Senior executives in the software and chip industries generally view the "software stock doomsday" narrative sparked by the AI intelligence wave as an overblown fear. "If this is indeed a turning point for BDCs, we should see widespread profit deterioration and accelerated credit pressure," said John Cole Scott, President of CEF Advisers. He added to his BDC holdings during the sell-off, including some shares of Blue Owl's technology fund. "The recent price weakness looks more like emotional overflow than widespread damage to balance sheets." Michael Cyprys, a senior analyst at Wall Street financial giant Morgan Stanley, wrote in a report on Wednesday that AI disruption in the software industry could also create new ultimate winners and highly diversified investment portfolios might benefit significantly if these winners "substantially offset poor investments elsewhere." Matt Maley, Chief Market Strategist at Miller Tabak & Co., believes that BDCs should see a rebound soon, the question is when. Poonawala wrote that concerns about AI disruption could also threaten large commercial banks through erosion of M&A and initial public offering (IPO) activities. Shares of Goldman Sachs Group fell nearly 6% since Tuesday, while Morgan Stanley fell 5%, both marking their worst three-day performance since November. Poonawala said that boutique investment banks' earnings are a good barometer for observing disruptions in capital market activities. For example, Evercore Inc. has not seen its business disrupted in the short to medium term, according to the company's CEO John Weinberg in a performance call on Wednesday. However, if the market environment remains tumultuous for a long time, it's hard to say. "If the market becomes extremely chaotic, to say it won't affect our business is unrealistic," Weinberg said. "It certainly could."