Credit Exchange with Lisa Lee

“The doomsday scenario is a complete over-exaggeration,” says David Manlowe, CEO of Benefit Street Partners, on the latest episode of Credit Exchange with Lisa Lee. Manlowe asserts that investors will have time to see the impact of artificial intelligence, which could even help boost margins at software firms.
“I don’t see a big company like, for example, Franklin Templeton, ripping out their core software system in the next couple of quarters.”
The average level of exposure is around 22-23% for BDCs, Manlowe says, but among funds, there’s huge disparity. If one drew a histogram of all private credit BDCs and their ownership of software, it would range from funds focused on technology at up to 70%, while others are at 2%. BSP, the $94 billion alternative credit business inside Franklin Templeton, has around 9.5% exposure to software.
Where the rubber really hits the road, is not in performance this quarter or next quarter, but when these companies have to refinance their debt, Manlowe notes. And that doesn’t really start until the second half of next year.
That said, there will be some early indicators in the earlier part of the year, and every quarter to follow. “You could see, over the next few quarters, an extended period of time where some of these software companies actually see a fairly significant margin expansion, because they’re so much more efficient at how they’re writing code and deploying code, so on and so forth.”
This raises a key question – how wide, and how deep, is the moat around a given software application?
On the recent withdrawals from semi-liquid private credit funds, Manlowe believes the design of the product was very thoughtful around the asset class. The 5% cap ensures what’s going into the funds actually has a duration that is shorter and can fund the redemptions.
“That five percent per quarter wasn’t a made-up number,” he says. “There’s something I learned through all this – maybe we didn’t educate as much as we should.
“Let’s get back out educating the investor base. It’s not a product design flaw.”
On the Iran war, Manlowe predicts it will have an impact on short-to-intermediate-term inflation. He is upbeat about the prospects for floating-rate credit markets in particular: “[The] underlying economy, both in the US and Europe, should be conducive to the companies that we lend to, and the companies in the market performing reasonably well.”

“We are going to see consumer pain, and particularly on the lower-income side of things,” says David Saitowitz, head of US liquid credit at ICG, a global alternative asset manager with $127 billion in AUM, on the latest Credit Exchange podcast with Lisa Lee.
That means certain sectors could get hurt while others do very well, he says, adding that it’s a trend he’s already seeing. Anything consumer related – whether it’s housing, travel, to apparel and retail, are under pressure.
“Those areas, I think, are all feeling a decent amount of pain, and I think they will continue [to].”
Saitowitz is especially worried about housing, as rates stay higher for longer. The economics around housing continue to be weak and that has real implications for people everywhere, he observes.
He also notes that we are in an interesting time where, with a massive technological innovation underway, that factor could be overshadowing geopolitical events which may have been considered in a more serious way previously.
On artificial intelligence, ongoing new advancements will lead to difficulties for software firms, he believes, especially those that were over-levered and need to refinance soon. “We will see some LMEs; we will see some bankruptcies,” he says.
And when that does happen, he adds, recent history suggests recoveries will probably be worse than we have seen in some time.
But that said, there’s plenty of companies that will do just fine, and Saitowitz doesn’t believe there will a widespread or massive spike in defaults.

Private credit firms, including Hayfin, are still willing to lend to software companies, says Marc Chowrimootoo, co-head of direct lending at alternative asset manager Hayfin, on the latest episode of the Credit Exchange podcast with Lisa Lee.
“If that call comes in, we absolutely take that call,” says Chowrimootoo, on how he responds to a request from a private equity fund for a software LBO financing. “We absolutely give it the due care and attention.”
But the willingness to partake has moderated, he adds. “Everyone is being much more judicious.”
There are a number of questions you can go through with a private equity buyer who understands what they’re doing, Chowrimootoo says. For example: how can I understand why this is more insulated than others out there? How embedded is this platform with its customers? What’s different about the ownership of data in this particular asset? What’s the protected moat around the end customer, and the usage of this in the technology?
Regarding software exposure more broadly in the private credit market, Chowrimootoo notes that Europe has less exposure compared to their counterparts in the US. In addition, while retail capital is a huge portion of the US market, European private credit funds have less than EUR 10bn in retail vehicles.
On the geopolitical front, Chowrimootoo says Europe has had to deal with many periods of volatility. “It’s way too soon to be making a judgment on where the direction of travel is on credit spreads; where the direction of travel on default levels are; where the direction of travel is on stress of earnings.”

The current period is a “really important rite of passage” for retail access to private credit and direct lending, says Tristram Leach, head of investments Europe at Apollo Global Management, on the latest episode of Credit Exchange with Lisa Lee.
“The five percent number is there for a reason,” says Leach, speaking about recent outflows from semi-liquid private credit funds that have seen a pickup in redemption requests (some firms have given back more than the agreed 5%; some have limited at 5%).
“It’s important to protect remaining investors. It’s a level of liquidity that has been promised. And in general, we think the appropriate way to proceed is to do what you said you’d do.”
Direct lending, he believes, will continue to grow – but it needs to go through a period where there are elevated redemptions in the marlet.
“People want their money back. You have to see the products work as they were designed to work. And the way they’re designed to work is they give five percent. That, broadly speaking, is the appropriate design, and how it should function,” Leach contends.
He adds that we are still in a fairly early period in the development of wealth access to direct lending. Consequently, it’s understandable that results in a “slightly flightier” asset base compared to institutions.
Leach understands the argument that the central composition of the direct lending market does put it more in the crosshairs of this threat.
“The very high software concentration, certainly among some of our peers in private credit, does create some additional risk when you think about AI disruption,” says Leach, who is also the co-head of European credit at Apollo.
Across the firm, Apollo has around 2% software exposure. Even within direct lending, Apollo is “clearly at the bottom end of the range,” Leach says.
Nonetheless, he believes the market was relatively slow to wake up to the potential of AI. “What’s surprising to me is that when Claude Code came out, the market suddenly noticed,” he says. “We’ve been watching the incredible pace and development of large language models for several years now.”
On Europe, the Iran war probably represents more of a cyclical threat to Europe than the US because of the energy price dynamic and geographical proximity, Leach believes. “That is definitely a headwind to growth; it’s a headwind to cyclical industries.
“Especially for companies exposed to growth in Europe, that’s going to be a challenge, because of the inflation impacts to energy prices.”
Nonetheless, that doesn’t materially impact Leach’s expectations for greater infrastructure investment and defence investments on the continent.
“There’s been a huge change in the attitude of European policymakers towards the need to spend money, become more productive, become more competitive. All these things are clearly felt viscerally within Europe because of how fragile the continent’s position seems. I think you’re going to see changes, and I think you’re going to see Europe seek to take advantage of the opportunity,” Leach says.
Leach also shares why, in football, he is wholly committed to Atlético Madrid.

“We’ve never had more undrawn capital,” says Jonathan Dorfman, chief investment officer at Napier Park Global Capital, a $40bn alternative credit manager. Napier Park has been prepping for a repricing of financial assets that predates the Iran war and the software crisis, Dorfman said in the latest episode of Credit Exchange with Lisa Lee.
Have ready cash and take advantage to buy assets that are going to come up for sale very soon, Dorfman advises. He says credit spreads should widen further: “We are going to see more and more problems occur, and more and more bad headlines.”
While Dorfman believes people will look back and say the headlines over private credit’s software issues were overblown, it’s appropriate there’s been a dramatic repricing, because of the enormous uncertainty caused by AI. The more sophisticated software companies are not going to sit still, and they will figure out how AI benefits them, and come out stronger. But some won’t.
On risk from the Iran war, Dorfman says history shows that markets usually have a short-term, very violent downward move with some type of capitulation to major geopolitical developments – but then they recover. Sustained high oil prices need to last at least a few months to meaningfully affect the real economy, and therefore financial markets. Right now, it’s too early to tell if this is a buy-the-dip moment. But it’s probably a fine strategy, he reckons.
A pioneer of the credit default swap, Dorfman says the CDX index is saying there’s a lack of fear about a recession and/or a meaningful economic slowdown. Risk premiums are higher, but they’re not high in an absolute sense that would be consistent with a slowdown.