Dawn Fitzpatrick 2.0 11 ideas

Fitzpatrick notes that Public BDCs (Business Development Companies) are trading at a ~23% discount to NAV due to fear of private credit contagion. The market is throwing the baby out with the bathwater. While software credit is bad, diversified BDCs are priced as if *all* credit is bad. Buying liquid BDCs at a discount offers a margin of safety and high yield. LONG Publicly Traded BDCs (via ETF or top-tier names). A severe recession causes defaults to spike across all sectors, not just software.

Fitzpatrick argues AI favors incumbents with massive scale and data moats. Varshney notes Citi has 30,000 developers using AI to generate code, saving 100,000 hours/week. Small disruptors cannot afford the capex or possess the proprietary data lakes that giants like JPMorgan or Walmart have. AI becomes a tool for incumbents to crush unit costs and widen moats, rather than a tool for startups to kill giants. LONG Mega-cap incumbents with data scale. Bureaucracy prevents effective implementation of AI tools.

The speaker notes that publicly traded BDCs are trading at an average "23% discount" to NAV, whereas private BDCs/funds must return capital at par (NAV) but are facing "elevated redemptions." This creates a liquidity arbitrage. Investors seeking liquidity will redeem from private funds (selling at $1.00) and rotate into public BDCs (buying $1.00 of assets for ~$0.77). This rotation creates buying pressure for public BDCs while allowing investors to capture higher yields due to the discounted entry price. LONG public BDCs to capture the discount closure and yield spread as capital rotates out of private vehicles. Systemic credit defaults increase significantly, causing the actual NAV of the underlying loans to drop, justifying the current discount.

The speaker explicitly references "Blackstone headlines" regarding private credit and predicts "elevated redemptions" will continue. They state it will be a "painful 18-24 months" for these structures. Asset managers like Blackstone rely on management fees on AUM. If investors are redeeming capital to fix overallocation issues or chase liquidity, AUM drops. Furthermore, if funds hit redemption gates (limiting withdrawals), it damages sentiment and slows new capital raising. SHORT (or AVOID) the major alternative asset managers heavily exposed to private credit retail flows during this redemption cycle. Blackstone has a massive "dry powder" reserve and could use the downturn to acquire distressed assets cheaply, boosting long-term value.

The speaker discusses a "software shakeout" and states that for the software sector, "this is a structural rerating that is deserved." "Structural rerating" is a euphemism for valuation multiples compressing (prices going down relative to earnings). The speaker links this to private credit stress, implying that software companies fueled by cheap debt are now vulnerable. SHORT the broad software sector (via ETF) as the market adjusts to lower multiples and tighter credit conditions for tech borrowers. Interest rates drop sharply, which typically boosts high-duration assets like software stocks.