Source item

Private credit was always on a search for companies that had a big moat (meaning competitors could not easily disrupt them) and stable cash flows. For years companies that fit this criteria were Software/SaaS companies. There are tens of thousands of them that makes specialized software for every industry and a multitude of applications. So private credit funds have a big weighting in Software/SaaS companies. Then AI came and disrupted the Software/SaaS industry. Now the cost of making software is collapsing towards zero and the fear is these companies are going to get disrupted by low cost entrants (smaller/no moat) offering the same Software/SaaS products at a fraction of the price (uncertain cash flows). That said, Software/SaaS companies haven’t been disrupted yet. So when the public companies release their Q1 earnings reports, they will show their moats and cash flows are still very much intact. But this is an issue of where the Software/SaaS companies are going next, not where they are now. Publicly traded Software/SaaS stocks have been getting crushed in the last few months on fears that these companies are about to experience huge disruption thanks to AI. The private credit funds are in a difficult spot. They value these companies based on where they are now, not necessarily an expectation of where they’re going next. Investors in private credit funds think these companies are in trouble, so if private credit funds CORRECTLY say that their valuation RIGHT NOW is still top dollar (because it is), then private credit investors will take that valuation and run for the hills. This is why these funds are seeing huge requests for redemption. It’s a difficult thing to do, which is why they have a problem in simultaneously telling everyone that the cash flows of these companies are great NOW, and also convinced them that they will be great going FORWARD in a world of abundant AI. https://t.co/3HcmwGeyjm