Why Private Equity's Software Bet Is Going to Zero | The Weekly Wrap

Market & macro context (rates, inflation, oil)

• 10-year Treasury yield: ~5.3%, “not seen since about 2002.”
• Key macro driver framing: market action is driven mainly by oil prices and interest rates.
• CPI note (inflation discussion):
  • CPI excluding energy (Aug): 2.4% (“not bad”).
  • Changes are attributed mostly to energy prices and possibly tariffs.
• Fed policy discussion (from mailbag):
  • The Fed cannot control oil prices, so rate hikes may not directly solve oil-driven inflation.
  • Higher oil prices can “seep into” the economy (e.g., higher fertilizer costs → higher food prices).

Recommendations / cautions (implicit)

• High rates can change the economics of leveraged investments, especially those funded with floating-rate debt.

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Company & sector-specific moves & investing implications

FICO / mortgage credit scoring

• Ticker mentioned: FICO
• Price move: FICO shares fell >25% on Tuesday; >60% YTD.
• Catalyst (regulatory):
  • FHFA chairman Bill Pulte proposed merging LLPA grids for FICO and VantageScore.
  • This would eliminate a 20-point discount for VantageScore.
• Expected market effect:
  • VantageScore becomes more competitive.
  • Rocket Mortgage announced switching to VantageScore.
  • Expect VantageScore rollout to accelerate over coming months.
• Stated “short thesis” theme:
  • FICO faces risk of losing mortgage “monopoly” due to pricing greed and regulatory anger.
• Explicit claim/disclosure-like commentary:
  • CEO William Lansing should be replaced (criticizing board effectiveness).

“SaaS apocalypse” narrative shifts (AI + valuations)

• Thesis: The “SaaS apocalypse” didn’t disappear—it transformed.
• Current framing:
  • Not necessarily that AI destroys software firms outright.
  • Instead, AI could slow subscriber growth and/or make price increases harder, hurting future profitability and valuations.
• “Safe” vs “at risk” characterization:
  • Potentially safer: firms with enterprise tech moats (e.g., ServiceNow, Salesforce).
  • At risk: B2C facing consumers (e.g., Intuit, Booking, Expedia) and some B2B.

Adobe valuation example (public indicator for the sector)

• Ticker mentioned: Adobe
• All-time high: $630/share in Feb 2024
• Current value: ~$240 (implied by “Today the stock is worth 240”)
• Drawdown: ~62% from peak
• Interpretation: the decline is tied to multiple compression / valuation fear, not necessarily immediate fundamental collapse.

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Private equity & private lending: why software bets may go to zero

Scale of PE/SaaS dealmaking (2017–2023)

• SaaS prominence:
  • “90% of all buyouts in technology” were in SaaS.
  • SaaS deal value was about a quarter of the total PE buyout market.
• Large PE players cited (volume ~2017–2023):
  • Thomas Bravo, Vista Equity, Silver Lake (~60% of SaaS buyout volume together)
• PE growth / deal size:
  • PE “averaging transactions worth between $100B and $400B per year.”
  • 2021 U.S. technology buyouts by PE: >$284B
  • Portion to software: $256B
• Key driver: low interest rates enabled heavy leverage.

Framework / logic used to argue capital destruction (step-by-step)

SaaS is argued to be attractive to PE because it is easy to model:

1. Revenue ≈ avg price per customer × avg customer count
2. Add assumptions on customer growth and price increases
3. Then add debt → deal is “done”

Since 2023, two shocks:

1. Higher interest rates → higher floating-rate debt service costs hit profits/cash flows.
2. “SaaS-pocalypse” narrative → valuations compress.

Corporate loan mechanics (“corporate debt ≠ mortgage”)

• Corporate loans are often interest-only and require refinancing at maturity.

Hypothetical capital destruction math

• Purchase price: $1B
• Debt financed: 50% = $500M (floating rate)
• Deal year: 2022, maturity 5 years → refinance in 2027
• Valuation drop assumption: company value falls 50% (from $1B to $500M)
• With debt tied to value → equity goes to ~zero (debt ≈ value)

If PE tries to get refinancing via private lending:

• Private lenders may require PE to contribute additional equity-like capital (another $500M) to strengthen the balance sheet.
• PE then likely steps aside because investing $1B total into an asset now “worth” $500M doesn’t make sense.

Outcome predicted

• Assets shift to private creditors
• “What they will do next—no one knows”
• Potential reputational/monetization issues for PE

Key risks asserted (performance / industry)

• Monetization timeline:
  • Traditionally: funds monetized in 3–4 years
  • Now (weaker IPO market): ~7 years
• Prediction:
  • Investments are “mostly wasted money”
  • Investors may never see profit
  • “Many assets… valued at zero”

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Illustrative large PE software buyouts (debt share vs “AI vulnerability”)

Debt-share figures are central; AI vulnerability is asserted qualitatively.

1. Citrix Systems

   • Led by: Vista Equity Partners
   • Purchase price: $16.5B
   • Financing: $8.55B syndicated bank loans + junk bonds
   • Debt share: 52%
   • Vulnerability call: vulnerable (AI could do similar work cheaper)

2. McAfee

   • Led by: Advent International and Permira
   • Purchase price: $14B
   • Financing: $8.96B junk bonds + credit loans
   • Debt share: 64%
   • Vulnerability call: “probably not” (cybersecurity expected to survive)

3. Zendesk

   • Led by: Hellman & Friedman and Permira
   • Purchase price: $10.2B
   • Financing: $5B private equity loans led by Blackstone Credit
   • Debt share: 49%
   • Vulnerability call: vulnerable

4. Proofpoint

   • Led by: Thomas Bravo
   • Purchase price: $12.3B
   • Financing: $4.6B syndicated senior credit line
   • Debt share: 37%
   • Vulnerability call: “probably not”

5. Anaplan

   • Led by: Thomas Bravo
   • Purchase price: $10.4B
   • Debt: $2.5B
   • Debt share: 24%
   • Vulnerability call: vulnerable
   • Lenders cited: Blue Owl, Gallop Capital, Blackstone Credit, Apollo Global

Aggregate takeaway

• 3 of 5 “vulnerable” cases (per the speaker’s view)
• Debt share range: 24%–64%
• Broad sample average described as ~50% debt

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Examples of PE deal failures / creditor takeovers (2024)

• Pluralsight
  • Creditors (Blue Owl mentioned) took control
  • Outcome: Vista’s equity stake wiped out
• Medallia
  • Thomas Bravo deal
  • August: fell into creditors’ hands; equity written off
• Note: both examples were not cybersecurity.

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Disclosures / disclaimers (explicit)

• Podcast is for informational purposes only and does not constitute investment advice.
• Host and guests may own the stocks discussed.
• Opinions are their own and are not recommendations.
• “Please conduct your own due diligence and consult with a licensed financial advisor.”

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Presenters / sources mentioned

• Steve Eisman (host/presenter)
• Bill Pulte (FHFA chairman; cited via X post)
• William Lansing (CEO of FICO; discussed critically)
• Edwin Dorsey (creator of Bear Cave newsletter; mentioned as a recent interview subject)
• Joseph Carlson (podcaster; mentioned for upcoming interview)
• Sam Badri (Cisco head of investor relations; mentioned for recent interview)
• Krishna Guha (Fed analyst at Evercore; upcoming interview)
• PE/lender/deal participants cited in examples:
  • Thomas Bravo, Vista Equity, Silver Lake, Vista Equity Partners, Advent International, Permira, Hellman & Friedman, Blackstone Credit, Blue Owl, Gallop Capital, Apollo Global