Marathon Asset Management CEO Bruce Richards Talks Software
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What is the main topic discussed in this episode?
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And you just put out a LinkedIn post saying, This morning, Danny and I were reading it before the program, likening what happened in energy in 2016, 2017, 2018 to what we're looking at in software now. Is it fair to compare those two industries? Because I think Scott was saying, hey, there's a different ball of wax here. It is a different ball of wax, and Scott's right to say there's no comparison between the industries. Well, let me explain why I come to that parallel. So back in 2014, a new technological change happened for oil and gas. It's called horizontal drilling, or fracking. And that technological change did a couple things. Number one, it changed the pricing structure for how oil and gas and oil and gas services would work.
And number two, based upon all the capital that was raised, now all of a sudden capital dried up because the pricing structure collapsed. And so what we have in software is very similar. We have a technological change which is forever going to change how software is going to be priced. Now we should think about that industry. And based upon that technological change and how much leverage is in the broadly syndicated loan market, and then more importantly in the direct lending market, leveraging up these software companies, The capital's now drying up. And so what did we see as a result of that technological change in oil and gas? We saw a 15% default rate in the subsequent years, 2016 and 2017. So for me to say that software, which is the biggest sector within the direct lending business, couldn't get to a 15% default rate,
I think is actually missing the mark, because I think that's exactly what's going to happen in years 27, and it has a chance of happening in 27 and 28, to have back-to-back years. So although the industries are very different, there's a lot of similarities when it comes to technology, changing how pricing structure works, at a time when too much capital has been flooding into the sector. Just think about this for a second, Matt.
What are the main concerns regarding highly-leveraged software default rates?
Only 1% of companies in the U.S. are software companies and only 7% of all publicly listed companies are software. Yet... 23% of the direct lending business is software. How did we get there? It was a gold rush to finance these software companies and these buyouts. And the public companies are sitting in good shape because their debt, when you look at NASDAQ, S&P, Russell 2000, the debt that these software companies have with really good margins, the debt that they have is only 0.5, less than one turn of leverage. In the broadly syndicated loan market, you have five turns of leverage, ten times the leverage. In the direct lending business, you could have 20 times the leverage. So you don't have the companies that can generate the free cash flow to reposition for AI.
They're in a very tough position. So, Bruce, what is the effect of that? I think a lot of investors are reading your research and starting to wake up to the fact that this could become a reality. And... As a result, we're seeing redemptions. People are trying to get out of these illiquid private credit funds.
How does Bruce Richards compare the software industry to the energy sector?
And what we see some of these companies doing, Blue Owl, for example, is, okay, we're going to sell a ton of these assets. We're going to sell these loans. And they want to be able to say, we got 99%, we got...
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:00–2:56
2
What are the main concerns regarding highly-leveraged software default rates?
2:56–4:02
3
How does Bruce Richards compare the software industry to the energy sector?
4:02–8:38
4
What technological changes are impacting software pricing structures?
8:38–10:36
5
What implications do high default rates have for the direct lending market?
10:36–11:43
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