The actual loan exposure of the U.S. private credit industry to the software sector may far exceed its disclosed levels.
On February 13, after reviewing thousands of holdings from seven major Business Development Companies (BDCs), Bloomberg found that at least 250 investments, worth over $9 billion, were not labeled as software industry loans by the lenders, even though these borrowing companies are clearly defined as software enterprises by other lenders, private equity sponsors, or the companies themselves.
This classification discrepancy not only makes it difficult for outsiders to accurately gauge the concentration of credit funds in the software industry but also underestimates the market's vulnerability as AI disrupts traditional software business models. Market observers point out that while this discrepancy does not necessarily imply intentional concealment, it does expose long-standing issues in the private credit industry's inconsistent reporting standards, complex fee structures, and excessive discretion in valuations.
Raymond James Financial Inc. analyst Robert Dodd warned that the existing classification methods often only cover general software, severely underestimating the exposure of the software industry as a business model, and this traditional classification system has become ineffective in the AI era.
Currently, loans to the software industry have become the largest single industry exposure for BDCs. According to estimates by Barclays Plc, software loans account for about 20% of all loans held by BDCs, significantly higher than the 13% proportion in the U.S. leveraged loan market. Amid recent turmoil in software stocks and the launch of new tools by AI startups like Anthropic PBC that threaten traditional software services, this large and ambiguous risk exposure has raised investor concerns about a potential &#34;new subprime crisis.&#34;
<h2>Invisible Exposure: The Redefined &#34;Software Company&#34;</h2>
Bloomberg News reviewed disclosure documents from BDCs managed by Sixth Street, Apollo Global Management Inc., Ares Management Corp., Blackstone, Blue Owl Capital Inc., Golub Capital, and HPS Investment Partners, finding that all these institutions exhibited a tendency to classify software companies under other industry categories.
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For example, Pricefx prominently touts itself on its website as &#34;the number one leading pricing software,&#34; yet one of its main lenders, Sixth Street Partners, classifies it as a &#34;business services&#34; company rather than a software company.
Sixth Street stated in its documents that the company groups investments by end market, so software does not appear as a separate category, even though it acknowledges that many portfolio companies primarily provide software products or services, which also exposes them to the industry's downside risks.
Additionally, Apollo classifies Kaseya, which calls itself an &#34;IT management software&#34; company, as &#34;professional retail,&#34; while Blackstone and Golub categorize it under software
Furthermore, Golub labeled Restaurant365, which claims to be a &#34;back-end restaurant system software&#34; provider, as a &#34;food product,&#34; placing it alongside Louisiana fish fry mix and Bazooka gum manufacturers; while Ares categorized it under software and services holdings.
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Barclays strategist Corry Short pointed out, this inconsistency makes it exceptionally difficult to compare the software exposure across the entire market.
<h2>Confusion in Classification Increases Difficulty in Risk Assessment</h2>
According to Bloomberg, this classification confusion even exists within the same company.
Blue Owl's largest publicly listed BDC—Blue Owl Capital Corp. has classified at least four companies as &#34;chemicals,&#34; &#34;infrastructure and environmental services,&#34; and &#34;business services,&#34; yet in its technology-focused fund, Blue Owl Technology Finance Corp., these four companies are explicitly labeled as &#34;software.&#34;
A spokesperson for Blue Owl responded that each fund has a different investment strategy, and therefore industry classifications may vary, with the goal of providing information in a consistent manner for investors to understand the risks.
Since private credit loans are typically negotiated privately and have low trading volumes, lacking an independent price discovery mechanism or universal benchmarks, the labels that fund managers assign to assets take on extraordinary importance.
Michael Anderson, Citigroup's global credit strategy head, stated, this increases the responsibility of BDC managers to accurately assess, value, and classify these assets, as these loans are not publicly traded and do not appear in widely tracked indices that investors can independently review.
<h2>Concerns Over Industry Concentration Amid AI Disruption</h2>
Over the past decade, attracted by predictable revenue streams, alternative asset management firms have poured into the software industry.
Apollo President Jim Zelter revealed earlier this month that approximately 30% of private equity funds have flowed into this sector during this period, with the software industry accounting for about 40% of all sponsor-backed private credit.
However, with the breakthrough advancements in AI technology, particularly the new tools released by Anthropic PBC that threaten various fields from financial research to real estate services, market anxiety regarding the future of software businesses has rapidly escalated.
The S&amp;P North American Software Index has fallen over 20% this year, with multiple instances of single-day declines exceeding 4% in recent weeks. Analysts believe that against the backdrop of AI reshaping the software industry, private credit managers will face increasingly stringent scrutiny.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3c777b64-7830-4b2d-8902-438fe7006afb.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3c777b64-7830-4b2d-8902-438fe7006afb.png"/>
Dodd from Raymond James pointed out that the different reporting methods for the same loan by BDCs create problems, and this inconsistency obscures the truth. The AI revolution is fundamentally disrupting software and its business functions, rendering historical industry classification guidelines obsolete

BIZD

A Bloomberg survey shows that the seven largest Business Development Companies (BDCs) in the United States have classified at least $9 billion in software industry loans as belonging to other industries, resulting in an actual software exposure that far exceeds the levels disclosed in financial reports. This classification confusion obscures the high concentration risk of credit funds in the software industry. Against the backdrop of AI disrupting traditional software models and the plummet of software stocks, this hidden exposure has raised market concerns about a "new subprime mortgage crisis."

- The private credit industry’s exposure to the software sector significantly exceeds disclosed levels, with at least 250 investments worth over $9 billion misclassified.  
- This misclassification complicates the assessment of credit funds' concentration in software, especially amid the AI disruption, raising concerns over market vulnerabilities.  
- Analysts warn that traditional classification systems are failing to capture the true exposure in the software industry, urging a revision of reporting standards to address the growing risks.

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