John Zito, co-president of Apollo Global Management’s formidable asset management division and its head of credit, delivered a stark and unequivocal assessment last month regarding the valuation practices of private equity firms, particularly concerning their software holdings. Speaking to a gathering of investment bank UBS clients, Zito asserted that current valuations in the private markets are fundamentally flawed, a pronouncement that has sent ripples through the alternative asset landscape already grappling with significant headwinds. "I literally think all the marks are wrong," Zito reportedly told clients, a sentiment later corroborated by CNBC following its initial publication by The Wall Street Journal. "I think private equity marks are wrong." His candid remarks represent a rare public acknowledgment of deep-seated concerns from within the highly opaque private markets, an arena that has seen unprecedented growth and investor enthusiasm in recent years.
The core of Zito’s concern stems from a dramatic divergence between the public and private markets, exacerbated by rapid technological advancements. For weeks, shares of publicly traded software companies have experienced a pronounced downturn, battered by investor fears that emerging artificial intelligence tools from innovators like Anthropic and OpenAI could render existing software solutions obsolete or significantly reduce their competitive edge. This market shift has intensified scrutiny on private credit lenders, who hold substantial loan portfolios tied to these very software companies. The apprehension is that these lenders may be operating on outdated valuations, creating a potential mismatch between the perceived and actual health of their underlying assets. This growing anxiety has already manifested in a wave of redemptions, with investors seeking to withdraw funds from private credit vehicles, signaling a possible erosion of confidence.
The Rise of Private Markets and the Software Boom
To fully appreciate the gravity of Zito’s statements, it’s essential to understand the meteoric rise of private equity and private credit over the past decade. Fuelled by a prolonged period of ultra-low interest rates, a search for yield, and a desire for uncorrelated returns, institutional investors — including pension funds, endowments, and sovereign wealth funds — poured trillions into these alternative asset classes. Private equity firms acquired companies, often with significant leverage, aiming to improve operations and resell them at a higher valuation. Concurrently, private credit emerged as a powerful alternative to traditional bank lending, offering flexible financing solutions to companies, particularly those backed by private equity.
The software sector, in particular, became a darling of private markets. Characterized by high recurring revenue, strong margins, scalability, and perceived resilience, software companies were seen as ideal candidates for private equity takeovers. Between 2018 and 2022, a period marked by abundant liquidity and historically low borrowing costs, valuations for software firms soared to unprecedented levels. Private equity funds, flush with capital, engaged in aggressive bidding wars, often paying multiples of revenue and EBITDA that far exceeded historical norms. Many of these acquisitions were heavily financed by private credit, with lenders eager to deploy capital into what was considered a robust and rapidly expanding sector. Industry reports from firms like Preqin and PitchBook indicate that deal values for software companies in the private market reached peak levels in 2021 and early 2022, with enterprise value to revenue multiples often exceeding 10x for high-growth SaaS businesses. This era fostered an environment where the "mark-to-market" principle, traditionally applied rigorously in public markets, seemed less urgent in the less transparent private realm.
The AI Tsunami and Public Market Repercussions
The landscape began to shift dramatically in late 2022 and accelerated through 2023 and into 2024. The rapid advancement and mainstream adoption of generative artificial intelligence, spearheaded by technologies from OpenAI (ChatGPT) and Anthropic (Claude), introduced a profound new dynamic. Investors in public markets began to re-evaluate the long-term viability and competitive moat of many established software companies. The fear is that AI could automate tasks, disrupt business models, or simply offer superior, more cost-effective solutions, potentially rendering swaths of existing software redundant or less valuable. This "AI disruption" narrative has led to a significant repricing of public software stocks, with many experiencing double-digit percentage declines, even for fundamentally sound companies. Market data from indices tracking software companies show declines of 20-30% or more for certain segments, with some individual stocks falling even further from their peaks.
This public market repricing naturally begs the question: if publicly traded software companies are facing such severe re-evaluations, what does that imply for their privately held counterparts? Zito’s comments highlight this exact disconnect. Unlike public markets, where prices are set daily by millions of buyers and sellers, private market valuations are typically determined less frequently, often quarterly, by internal committees or third-party appraisers. There’s a natural lag, and arguably, an inherent reluctance, to mark down assets aggressively, as it can impact fund performance metrics, management fees, and investor sentiment. Zito’s bluntness suggests that this lag has become a chasm, with private market "marks" no longer reflecting current realities.
A Growing Tide of Concerns and Institutional Responses
The skepticism articulated by Zito is not entirely new, but his internal position at a major alternative asset manager lends it particular weight. For some time, prominent financial figures outside the private markets have been sounding alarms. Jeffrey Gundlach, CEO of DoubleLine Capital, and Mohamed El-Erian, chief economic advisor at Allianz, have both publicly flagged potential risks within the private credit sector, pointing to the rapid growth, often less stringent covenants, and potential illiquidity. Their warnings, while respected, have sometimes been dismissed by industry proponents as external critiques. Zito’s intervention, however, comes from the heart of the industry.
The consequences of this valuation mismatch are now becoming tangible. Retail investors, who have increasingly gained access to private credit funds through various structures, have begun to withdraw their capital at an accelerating pace. According to analysis by the Financial Times, approximately $10 billion was pulled from private credit funds by retail investors in the first quarter alone. This "stampede" of redemptions is a significant indicator of waning confidence, prompting an array of industry leaders, including those from Blackstone and other major players, to issue statements aimed at calming markets, emphasizing the resilience and strong performance of the underlying companies in their portfolios.
However, sophisticated institutional players are already taking more concrete action. JPMorgan Chase, one of the world’s largest financial institutions, has reportedly begun to rein in lending to private credit players and has taken the significant step of marking down the value of software loans on its books. This move by a major bank serves as a powerful validation of Zito’s concerns, signaling that even large, well-capitalized lenders perceive a heightened risk in this segment. Marking down loans implies a recognition that the collateral (the software companies themselves) may be worth less than previously assumed, potentially leading to higher capital reserves or reduced lending capacity for private credit funds.
Apollo’s Differentiated Position and the "Bad Ending" Warning
Despite Zito’s critical assessment of the broader private markets, Apollo Global Management has sought to differentiate its own exposure and strategy. An Apollo spokesman declined to comment directly on Zito’s remarks, but the firm has actively communicated its specific positioning to analysts and investors. Apollo executives have emphasized that the vast majority of its loans are extended to larger, more stable companies, many of which are rated investment grade. Crucially, the firm stated last month that software constitutes less than 2% of its total assets under management. Furthermore, Apollo clarified that it has zero direct exposure to private equity stakes in software firms. This strategic emphasis aims to reassure investors that while Zito’s concerns about the market are valid, Apollo’s specific portfolio construction mitigates much of that risk.
Zito’s comments at the UBS event extended beyond mere valuation critiques, delving into the potential for significant losses. While his primary focus was on private equity valuations, he underscored the symbiotic relationship with private credit. If the equity of a company is overvalued and subsequently declines, the loans extended to that company are also inherently in worse shape. He specifically highlighted software companies taken private between 2018 and 2022 – a period of high valuations and low interest rates – as particularly vulnerable. Many of these, he warned, were "lower quality" than their larger, publicly traded counterparts, suggesting that a significant portion of the growth in that era came from less robust businesses.
The grim prognosis included a chilling estimate for potential recovery rates on loans to generic small-to-medium sized software firms caught "in the wrong place" due to the new AI-led regime. Zito suggested that lenders could recoup "somewhere between 20 and 40 cents" on the dollar in such scenarios. This range implies potential losses of 60% to 80% for private credit lenders heavily concentrated in this specific segment, a figure that would be catastrophic for many funds.
However, Zito was careful to distinguish between targeted, imprudent strategies and the broader resilience of the private credit asset class. He believes that while lenders who "focused heavily on the software sector" are indeed heading for trouble, the overall asset class will endure the current upheaval. His concluding remarks served as a powerful warning against speculative and undiversified practices: "If you do stupid things and you do concentrated things, and you do things that you’re not supposed to do in your vehicle," Zito cautioned, "you probably will have a bad ending." This implies that the private markets, while robust in principle, are not immune to the consequences of poor underwriting, excessive leverage, and a lack of foresight regarding technological disruption.
Broader Implications and the Road Ahead
Zito’s outspoken critique arrives amid a challenging backdrop for alternative asset managers generally, with many seeing their shares battered this year as investors grapple with higher interest rates, economic uncertainty, and concerns about asset valuations. His comments could catalyze a more widespread re-evaluation of private market holdings, potentially leading to increased transparency and more conservative valuation practices across the industry.
The implications are far-reaching. For institutional investors, Zito’s warnings will likely prompt a deeper dive into their private equity and private credit allocations, demanding greater transparency and independent verification of valuations. Due diligence on new fund commitments could become more stringent, with a particular focus on sector concentration and the quality of underlying assets. For the private credit industry itself, this period could mark a critical juncture. While the asset class has grown exponentially, its resilience in a truly distressed environment has yet to be fully tested. Significant losses in specific segments, as Zito outlined, could lead to a tightening of lending standards, a greater emphasis on senior debt positions, and a reduction in highly leveraged deals, particularly in sectors prone to rapid technological disruption.
Regulatory bodies globally are also likely to take note. The opacity of private markets has long been a point of discussion, and any indication of systemic valuation issues or significant investor losses could spur calls for greater oversight and standardization of reporting. The current environment underscores the inherent risks of illiquid investments and the importance of robust risk management frameworks.
Ultimately, John Zito’s candid assessment from within Apollo Global Management serves as a crucial wake-up call. It highlights the potential for a significant reckoning in certain corners of the private markets, particularly those that gorged on high-flying software assets during a period of exuberance. While the broader private credit market may prove resilient, his warning underscores that for those who made concentrated, high-risk bets without adequately accounting for market shifts and technological disruption, a "bad ending" may indeed be on the horizon. The coming months will reveal the true extent of these valuation discrepancies and the subsequent impact on the alternative asset management industry.