John Zito, co-president of Apollo Global Management’s asset management division and head of credit, delivered a stark and candid critique of the private equity industry’s valuation practices during a recent client presentation. Speaking to investors via UBS last month, with remarks first reported by The Wall Street Journal and confirmed by CNBC, Zito stated bluntly that the valuations, or “marks,” assigned to software holdings by many private equity firms are fundamentally disconnected from current market reality.
The AI-Driven Market Disconnect
Zito’s assessment points to a growing chasm between the lofty valuations pinned on private software companies during the 2018-2022 buyout boom and the brutal repricing occurring in public markets. Shares of publicly traded software firms have been pummeled for weeks. Investors are fearful that next-generation artificial intelligence tools from leaders like Anthropic and OpenAI could render existing business models obsolete. This public market panic has intensified concerns that the loans backing these private companies—a massive segment of the private credit market—are carried on books at values that no longer reflect the new competitive landscape.
A Wave of Investor Redemptions
The anxiety has triggered a significant investor exodus. Analysis by the Financial Times indicates that retail investors withdrew approximately $10 billion from private credit funds in the first quarter of 2024. Amid this stampede, industry executives have tried to reassure clients, arguing that the fundamental performance of underlying portfolio companies remains stable. However, Zito’s comments suggest this reassurance may not extend to all corners of the market, particularly those heavily concentrated in software.
Wall Street Acts: JPMorgan’s Markdowns
Signals from major financial institutions are now aligning with Zito’s private skepticism. JPMorgan Chase, one of the largest providers of leveraged finance, has begun actively reining in its lending to private credit players. The bank is marking down the value of software loans in its own portfolio, a concrete action that validates fears of widespread valuation corrections. While prominent figures like bond king Jeffrey Gundlach and economist Mohamed El-Erian have publicly warned about private credit risks, Zito’s perspective is notable because it comes from a top executive at one of the world’s largest alternative asset managers.
Apollo’s Strategic Divergence
An Apollo spokesperson declined to comment on Zito’s specific remarks. The comments arrive as alternative asset managers face intense share price pressure this year. Apollo has been keen to distinguish its own strategy from the pack. In conversations with analysts last month, the firm highlighted that the vast majority of its credit portfolio is lent to larger, investment-grade-rated companies. Crucially, Apollo disclosed that software sector exposure represents less than 2% of its total assets under management. Furthermore, the firm stated it has zero exposure to private equity stakes in software firms, insulating its direct equity book from the specific risks Zito described.
The “Bad Ending” for Concentrated Bets
Zito clarified that his initial critique focused on private equity marks, but the two asset classes are deeply intertwined. Many companies acquired in the 2018-2022 era—a period characterized by cheap money and peak valuations—also loaded up on private credit loans. “If the loans are in trouble, that means the equity is also in worse shape,” he noted.
He singled out these vintage-year software buyouts as particularly vulnerable, characterizing many as “lower quality” than their established public counterparts. The core of his warning is a dire prediction for recovery rates. For lenders to a typical small-to-medium sized software firm that is poorly positioned for the AI transition, Zito estimated eventual recoveries could be as low as “somewhere between 20 and 40 cents on the dollar.”
Zito’s prescription is a warning against concentration and strategy drift. “If you do stupid things and you do concentrated things, and you do things that you’re not supposed to do in your vehicle,” he said, “you probably will have a bad ending.” His view is not a death knell for the entire $1.5 trillion private credit market, but a stark delineation between prudent, diversified lenders and those overly exposed to a single, disrupted sector.
Editor’s Note: This article is based on reported remarks from an Apollo executive, data from the Financial Times, and public statements from major financial institutions. All original source attributions and HTML elements have been preserved.
