Why Private Equity's Software Bet Is Going to Zero | The Weekly Wrap
The host examines how higher interest rates and AI-related concerns could expose heavily leveraged private equity investments in software companies, potentially wiping out equity when loans come due for refinancing. He concludes that the problem is unlikely to sink the economy but could damage private equity’s reputation and leave many investors with little or no return; he also discusses FICO’s competitive threat, oil-driven inflation, and the Fed’s response.
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The host argues that private equity’s software exposure is increasingly problematic in a higher-rate environment and expects the industry to take years to work through the resulting challenges.
The host thinks many software investments may produce no return for investors and that some private equity investments could be marked to zero.
The host says software buyouts were often financed with substantial debt, averaging roughly 50% of the purchase price across a broader sample.
The host explains that if a $1 billion software company is bought with $500 million in debt and its value falls to $500 million, its equity becomes worthless, potentially requiring new equity to refinance.
The host says AI need not destroy software companies to hurt their prospects; slower seat growth or weaker pricing power could reduce future profitability and valuations.
The host says 90% of tech buyouts were software-as-a-service companies, and that these deals accounted for a quarter of the private equity buyout market.
Intro
Steve Eisman introduces the weekly episode, announces early access for premium subscribers, and previews discussion of Iran, FICO, private equity exposure to software, and listener questions.
Iran War Updates
Eisman says oil prices and interest rates are driving markets amid the Iran conflict, noting the 10-year Treasury yield has reached levels not seen since 2002.
More Negative News For FICO
Eisman says FHFA changes favor VantageScore, prompting Rocket Mortgage to adopt it, and argues FICO’s pricing strategy put its mortgage-score monopoly at risk.
Analysis of Private Equity & Private Credit's Exposure to Software
Eisman explains how private equity loaded up on subscription-software buyouts during low-rate years, then analyzes AI-related valuation pressure, debt financing, refinancing risk, and potential equity wipeouts.
Mailbag: Raising Rates
Answering a listener, Eisman says the Fed cannot control oil prices but may raise rates when sustained energy costs spread through the economy and broader inflation.
Mailbag: AI Regulation
Eisman rejects the idea that AI leaders primarily seek regulation to create a duopoly, arguing that present-day risks such as hacking can be addressed through company management and oversight.
Mailbag: MBS
Eisman recounts spotting mortgage-credit deterioration before the financial crisis through prior subprime failures, weakening underwriting, and Moody’s securitization data tracking rising delinquencies.
Outro
Eisman promotes recent and upcoming interviews, including conversations about prediction markets, AI’s effects on software and Cisco, and the Fed, before closing with a subscription appeal and disclaimer.
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Important Disclaimers
Not Investment Advice: For education only — not financial, tax or legal advice.
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