Private equity executives from top firms have bluntly stated that risk management in the industry has failed, and that the software bubble should have been seen three years ago.

Executives at Apollo Global Management have stated that the private equity industry is facing a long period of pain in software investments, as the industry has failed to recognize in time that new technologies such as artificial intelligence will disrupt the long-favored track of private equity. David Sambur, a partner at Apollo and co-head of private equity, said in an interview, "People are just now starting to realize that there is going to be a multi-car pile-up on the software investment highway. All the signs were there in 2022." Sambur pointed out that about three years ago, the introduction of AI chat technology Siasun Robot&AutomationChat GPT by OpenAI, combined with rising interest rates, have been the catalysts for the recent sell-off of tech stocks that has rocked the market in recent weeks. Recently, Wall Street has been selling off software stocks, as investors fear that the new generation of AI tools from companies like Anthropic may eventually make existing Software as a Service (SaaS) providers obsolete. Earlier today, Anthropic introduced a new feature in its AI model that can scan code repositories for security vulnerabilities. In response to this news, both CrowdStrike and Cloudflare fell by over 7%. The private equity industry has a large exposure to the SaaS sector because they value the stable, predictable revenue models of these software companies with loyal customer bases. Private equity firms have made huge investments in this area over the past few years, reaching a record $348 billion in 2021. Sambur said, "Have we fallen into groupthink, where 30% to 40% of acquisitions are concentrated in the software space? In hindsight, this was actually a significant warning sign. When people look back on this phase, they will see it as a failure of risk management." As many software investments made during the pandemic approach the end of the traditional holding period for private equity, the market is increasingly concerned whether these companies can sell assets at the desired prices and realize returns. This could also damage fundraising plans for private equity firms and weaken their ability to engage in new transactions. Sambur stated that the industry needs to prepare for a "much-needed reset" in valuations, as investors are reevaluating the economic models and future growth rates of software companies. "When you actually sell these companies, you will see the results, but it takes time for this process to fully manifest." As of December 31 last year, Apollo managed assets worth around $938 billion. According to Sambur, the company's private equity business has "zero exposure" to the software sector, with the overall group exposure being less than 2%. Nevertheless, Apollo's stock price has been dragged down by the industry, falling over 14% this year. The Apollo private equity management team (including Sambur) mentioned in a letter sent to clients this week that the decision to "stay away from this area is based on investment and risk management considerations, not a blanket denial of the entire industry." They wrote that there are winners and losers in the software industry, but "we believe the potential returns do not match the risks in leveraged buyout funds." The letter also stated that Apollo will continue to look for new opportunities arising from market turmoil. Other prominent M&A firms have also been reassuring investors recently, emphasizing that their exposure to the software sector is limited or manageable. It is rumored that Thoma Bravo and Vista Equity Partners have met with investors to ease concerns. This article was originally published by "Cailianshe" and edited by GMTEight.