Apollo CEO John Zito is skeptical about valuations for private equity programs

Apollo John Zito had a frank assessment of how private equity firms are valuing their software holdings at a time when shares of similar public technology companies have fallen: He said they’re not.

Zito, co-head of the firm’s giant asset management division and head of its credit division, spoke to clients of investment bank UBS last month in remarks first reported by The Wall Street Journal. CNBC confirmed Zito’s statements.

“I literally think all the signs are wrong,” Zito told agents. “I think the private equity labels are wrong.”

For weeks, investors have punished stocks of public software companies over concerns that the latest tools from Anthropic and OpenAI will make these companies obsolete. This has heightened concerns that private credit lenders are sitting on outdated valuations for their software loans, igniting a wave of redemptions as investors ask to withdraw money from private credit instruments.

Retail investors pulled about $10 billion from private credit funds in the first quarter, according to an analysis by the Financial Times. Amid the scramble, a group of industry leaders sought to calm markets by showing that core companies were still performing well.

But advanced players including JPMorgan Chase It has begun to act, curbing lending to private credit companies by devaluing software loans.

While Wall Street figures, including Jeffrey Gundlach and Mohamed El-Erian, have pointed out the risks in private credit, Zito was among the first from within the industry to openly acknowledge the market’s weakness.

An Apollo spokesman declined to comment on Zito’s statements. It comes amid a difficult backdrop for alternative asset managers, who have seen their stocks take a hit this year. Zito and other Apollo executives sought to differentiate Apollo from other players in private credit.

Apollo told analysts last month that most of Apollo’s loans are for larger, more established, investment-grade companies, and software makes up less than 2% of the company’s total assets under management. She added that the company does not have any exposure to private equity stakes in software companies.

While Zito’s comments at the UBS event were about private equity valuations, many of the companies the industry bought also took out private credit loans. He noted that if loans are in trouble, that means equity is in worse shape as well.

Zito singled out software companies that were taken private between 2018 and 2022 — a period of high valuations and low interest rates — as particularly exposed, warning that many were “less good” than larger public competitors.

Zito also said that private credit lenders, and thus the investors backing the loans, could see significant losses in the coming years. That depends on what he said might be the eventual recovery rates for loans to a small- to medium-sized public software company.

He said lenders could recover “between 20 and 40 cents” in those companies if they were “in the wrong place” regarding the new AI-driven system.

While lenders that have focused heavily on the software sector are headed for trouble, in Zito’s view, the broad asset class will withstand the current turmoil.

“If you do stupid things and you do focused things, and you do things that you’re not supposed to do in your car, you’re probably going to end badly,” Zito said.