Following the software sell-off, panic appears to have eased, with a rebound now visible in parts of the market, so where are private credit investors focusing their efforts?<\/p>\n
The future viability of software as an industry \u2013 and as an investment opportunity \u2013 was called into question earlier this year after artificial intelligence (AI) developer Anthropic unveiled tools seen as capable of disrupting large parts of the sector.<\/p>\n
The breakthrough initially rattled markets, triggering a sell-off in software companies which fed through into private credit, with the sector being favoured by lenders, hitting US-listed private credit vehicles.<\/a><\/p>\n However, several months on, some of the sector has recovered. Software company Snowflake, for example, saw a sharp sell-off between February and April, with its share price at one point more than 50 per cent below levels a year earlier.<\/p>\n By June, the company had staged a strong rebound, recovering much of those losses after announcing increased investment in AI, with investors now expecting it to benefit from AI-driven demand.<\/p>\n \u201cThere was a bit of panic early on, but you\u2019ve seen a big rebound,\u201d Anant Kumar, global investment strategist at Benefit Street Partners, told Alternative Credit Investor. \u201cSoftware sold off massively in quarter one, but if you look at say the IGV ETF, it has recovered a lot of its losses.\u201d<\/p>\n Read more:\u00a0Bank of England reveals stress test for private markets\u00a0<\/a><\/p>\n In regard to software companies, Kumar said that there are parts of the market that are \u201ctruly doomed\u201d, some that will be disrupted in a manageable way and some that may benefit from AI. A nuance which has not been fully priced in.<\/p>\n The idea that some software companies may benefit from AI has also been overlooked, according to Jakob Schramm, head of private credit at Golding Capital Partners, as the technology can enhance rather than replace existing models.<\/p>\n \u201cAI is also a chance for a lot of software companies,\u201d he told ACI.<\/p>\n Golding has a software exposure of around 10 to 15 per cent, which Schramm said is unlikely to change materially. Exposure is focused on lower mid-market and mid-market firms rather than large-cap names with higher headline risk.<\/p>\n He added that the most resilient businesses are those that are vertically integrated, data-rich and embedded in customer systems.<\/p>\n