Armen Panossian 5.0 2 ideas

Panossian states the problem in private credit is concentrated in pre-2022 "vintages" where ultra-low rates led to excessive risk-taking, particularly in software lending. He warns that AI (agentic AI) poses a "binary" displacement risk to legacy software companies, making losses "quite severe." Software was a "darling sector" for private credit during the low-rate era. Post-ChatGPT, the risk of AI disrupting these legacy business models was not priced in. Funds with high software exposure (30-40% of portfolios) are seeing meaningful outflows and trade at steep discounts. The "hurdle is very, very high" to invest in software companies now. They must be "winners in a post-AI world." Oaktree avoided these recurring revenue loans as they were not appropriately compensated. A crisis of confidence leading to leveraged providers (banks) pulling financing from these vehicles, forcing distressed sales.

Panossian explicitly states that software companies face high AI disruption risk, and Oaktree has avoided non-cash pay interest loans (e.g., PIK, recurring revenue loans) associated with software due to inadequate compensation. AI, particularly agentic AI, can rapidly displace legacy software businesses, leading to binary outcomes and severe credit losses, especially in levered portfolios where software exposure is significant. AVOID the technology services sector, specifically software companies within private credit, due to unpredictable AI risks, potential for drastic markdowns, and high investment hurdles. Slower-than-expected AI progression or successful adaptation by software companies could make avoidance overly conservative, missing recovery opportunities.