An aggressive stock market sell-off driven by investor fears that artificial intelligence (AI) will disrupt the software industry has affected some of Wall Street’s largest money management firms, prompting executives to respond. On a recent earnings call, Blue Owl (OWL) co-CEO Marc Lipschultz addressed concerns about a potential overhaul of enterprise software, stating, “For those on the call that are thinking Fortune 500 companies are going to take all their software and just rip it out and just say, ‘I’ll just ask ChatGPT,’ that’s simply not the way it works.”
Lipschultz’s comments followed remarks by Nvidia CEO Jensen Huang, who dismissed worries about AI reinventing enterprise software tools and undermining legacy companies. Despite these reassurances, Blue Owl’s stock fell approximately 4% following the announcement of its quarterly results, which marked the first time the firm reported $300 billion in assets under management (AUM). Over the past month, Blue Owl’s stock has declined by 27%.
While addressing investor concerns, Lipschultz clarified that the firm does not foresee “material degradation” in the performance of its funds. He emphasized that the losses currently reflected in the market would require “destroying 70% of the value of every one of these software companies” to materialize. Blue Owl’s exposure to software loans represents just 8% of its total assets, with nearly half of its AUM concentrated in its private credit platform.
“Of course, I can do it in math,” Lipschultz noted. “But there’s no relation to any practical statistic that would lead to anything other than … a lower return for a year, [or] you get a lower return for a couple of years.” The remarks highlight the firm’s confidence in its portfolio despite the current market volatility.
UBS strategists recently warned that in an “aggressive disruption” scenario, private credit loans could face heightened default-rate risks, particularly compared to other segments of the credit market. This week, Blue Owl’s larger competitor, Ares Management (ARES), also sought to quell investor fears during its quarterly report. Ares disclosed that its software industry exposure constitutes “less than 9% of its total private credit assets under management,” with AUM surpassing $600 billion in the fourth quarter, predominantly in its credit platform.
Ares CEO Michael Arougheti reassured analysts, stating, “We see no change to our earnings growth outlook from AI risks in our existing portfolio, and our business can naturally adapt to the risks and opportunities as they’re presented.” Despite these reassurances, Ares’s stock experienced an 8% drop on the same day.
The recent sell-off has affected shares of Blue Owl, Ares, and several alternative investment firms on Wall Street, including private equity giants like Apollo Global Management (APO), Blackstone (BX), and KKR (KKR). This downturn reflects a broader market decline among software-related stocks, which have become pivotal acquisition and investment targets for many alternative asset managers due to their attractive profit margins and subscription-based revenue models.
Over the past decade, private equity firms have acquired more than 1,900 software companies, according to data compiled by Bloomberg. Loans linked to software companies account for approximately 18% of all loans held by a popular private credit fund vehicle known as a business development corporation (BDC), as reported by Pitchbook.
In light of the market dynamics, Lipschultz stressed the importance of differentiating between equity and debt when discussing software exposure. “The stock equity versus debt is kind of an important starting point, with all this getting conflated,” he said. “When we talk about software, we are, on average, around 30% loan to value … [and] since the vintage of those transactions, equity values, on average, are up 23%.”
Last week, Blue Owl disclosed that investors withdrew 15% of net assets from its tech-focused fund, Blue Owl Technology Income Corp., after increasing the permitted amount of withdrawals. The firm previously had to abandon merger plans between two of its funds due to “current market volatility.”
Despite the challenging environment, Lipschultz expressed confidence in the firm’s performance, stating, “We continue to see very healthy portfolios at the end of the day. Performance is the ultimate measure, not anecdote.” As the landscape of software investing continues to evolve amid AI advancements, the long-term implications for asset managers and investors remain a key area of focus.
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