Arini Capital Management founder Hamza Lemssouguer stated in a recent interview that concerns about the disruptive potential of artificial intelligence (AI) alone are sufficient to drive up financing costs for software companies. This could subsequently create a chain of problems for this highly leveraged sector. Lemssouguer remarked, "We don't need to wait for the actual impact of AI to see issues emerge. The market always reacts in advance. The most immediate problem now is the continuously rising financing costs for a large number of software firms, which will ultimately lead to widespread defaults, industry consolidation, and disruption in credit markets."
The credit investment firm, which manages over $17 billion in assets, currently maintains minimal exposure to the software industry. In recent weeks, sustained selling pressure has hit the sector as investors grow concerned that advancements in AI technology could undermine the business models of software companies. Software firms generally carry debt loads that far exceed their earnings levels and rely heavily on private credit institutions for financing. This dynamic has also placed related institutions under scrutiny. For instance, Blue Owl Capital closed one of its funds and initiated asset sales following significant investor withdrawals.
Lemssouguer warned that as direct lenders begin to reduce their exposure to the software sector, the impact could intensify further. Although Arini Capital Management also engages in direct lending, it welcomes increased regulatory scrutiny on systemic risks. Lemssouguer commented, "Given the scale of industry expansion, the private credit market has grown large enough to warrant attention and consideration. This is a healthy development. All industries go through cycles, and now it's private credit's turn."
The private credit market has experienced rapid growth in recent years, now reaching a size of $1.8 trillion. Lemssouguer believes that tighter regulation does not imply reduced opportunities in the sector, but he noted that the previous concentration of capital in the software industry was clearly excessive. He stated, "Every asset class carries both risks and opportunities, corresponding to expected returns, default probabilities, and potential losses. The concentration of direct lending in the software industry has exceeded reasonable thresholds. For credit institutions pursuing stable operations, such a high level of industry concentration clearly contradicts prudent principles."
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