Insights

Many of you will have seen news over the past few weeks regarding the US Private Credit sector’s exposure to software and flow on concerns regarding the impact of AI on the software businesses. Investor concerns have centred around those managers who are most exposed with most press articles focussed on Blue Owl Capital as amongst the largest players in the private credit market they have the highest exposure.

Blue Owl was also in the press recently as they were forced to abandon a plan to have a listed fund which was trading at a circa 20% discount to NTA acquire units in an unlisted interval fund which had exceeded its 5% quarterly redemption cap.

There is a lot of news being reported and a lot for investors to digest in a rapidly evolving situation. In this note we have summarised what we think are the key points for investors to be thinking about at this time:

1. Software performance is fine (for now). Earnings have held up well, but the concerns related to how these businesses can sustain margins and growth with the threat of a cheaper and more efficient AI-alternative. Some will harness the power of AI to continue to grow and possibly even improve margins. Some will not.
2. Capital structures are the problem– acquisition multiples have declined sharply. US private credit firms have emphasised how they have lent to software businesses at 30-40% loan to value ratios but in aggressively structured formats (e.g. annual recurring revenue loans). With valuations having declined by 40% or more, LTVs have increased sharply. Even where earnings are growing at c. 5% annually, these loans are going to be far more difficult to refinance in the years to come. With this issue in mind many commenters are questioning how loan valuations have not been affected by the declines in equity valuations. We don’t think this is unreasonable. The reality is that the market has been so hot that despite weaker fundamentals, loan valuations themselves have not been impacted. Blue Owl’s Technology Finance Fund reported that in December 2025 the weighted average spread for all accruing floating rate new investments declined to 4.6%, down from 5.5% only 6 months prior. Competition has driven spreads tighter and loan valuations higher even in the face of higher loan to valuation ratios. Looking forward it may be different.
3. Fund flows matter– because of the scrutiny on the sector, many interval funds were already hitting their redemption gates in Q4 25, this will only worsen in Q1 26. Goldman reported redemption rates of 5% on average in Q4 with OTIC at 15.4% – the sector went from US$10bn in net flows in Q3 25 to less than US$4bn in Q4 25. Lack of capital makes it more difficult to extend and pretend as new money coming into the sector is going to want to be paid for the risk of a 60%+ LTV loan. We are already seeing asset sales (incl. some to related parties) to pay down debt and return capital to investors and activist investors getting involved in listed funds which are trading at material discounts – this will further tighten conditions. Many managers do have significant levels of institutional uncalled capital and leverage capacity. So, the flows story will be an evolving one.
4. Leverage only exacerbates the issue– in mid-2025 the RBA estimated global banks had US$300 billion in loans to private credit managers. The size of the US BDC credit market has grown to US$80 billion, from US$30 billion c. 2.5 years ago, a >40% CAGR. Over the past 12 months spreads have widened by c. 0.60% at a time when wider market spreads have been flat.

Turning to the domestic private credit market we think the following is important:

1. Exposure to software/AI redundancy risks are relatively low. We put software exposure in Australian private credit at less than 10%, less than half the exposure within US private credit markets
2. Investors still need to dig – there are domestic managers who have exposure to US private credit via joint ventures or even via investments in CLOs. It’s not as simple as putting a line through all Australian managers and saying they are fine.
3. Fund flows matter here too. We have been warning for some time about the risks around governance practices and the potential for these to act as a catalyst for outflows and for similar outcomes.
   The constant challenge for investors which is especially true in this environment is that the assessment of the risk of a fund is not just about the assets, it’s not just about the manager and not just about their governance practices. A major determinant of outcomes will be how other investors respond. This is a much tougher proposition for investors to assess – size and scale matters here, access to institutional capital, transparency and approach to governance. A private credit firm with one open ended fund, poor valuation discipline, external leverage and lack of scale is far more exposed than the alternative.

The constant challenge for investors which is especially true in this environment is that the assessment of the risk of a fund is not just about the assets, it’s not just about the manager and not just about their governance practices. A major determinant of outcomes will be how other investors respond. This is a much tougher proposition for investors to assess – size and scale matters here, access to institutional capital, transparency and approach to governance. A private credit firm with one open ended fund, poor valuation discipline, external leverage and lack of scale is far more exposed than the alternative.