Marathon's Richards on Software Lending and Defaults
Summary
- The "Software Lending" Bubble: Richards draws a direct parallel between the current software direct lending market and the 2014 Oil & Gas crash. He predicts a 15% default rate in software loans hitting in 2027-2028 due to excessive leverage (20x in private credit vs. 5x in syndicated markets) and AI-driven pricing disruption.
- The "HALO" Rotation: Capital is fleeing intangible assets for "HALO" (Hard Assets, Low Obsolescence). Marathon is aggressively pivoting toward collateral-based lending (aircraft, maritime, turbines, cranes) where recovery rates are near 100%, unlike software where recovery is near zero.
- Winners vs. Losers: Private Credit lenders holding the bag on software loans will suffer "zeros," while Public Private Equity firms with dry powder will thrive by acquiring these distressed assets at pennies on the dollar.
Trade Ideas
Richards explicitly names "Blue Owl" (transcript: "Blue Wall") as a firm trying to sell software loans to prove liquidity, but questions their ability to sell 20x leverage loans at par value. Blue Owl is a dominant player in the software direct lending space. If the "pricing structure collapses" and defaults spike to 15% as Richards predicts, OWL's book value and reputation face significant downside risk. They are the proxy for the "excessive leverage" thesis. AVOID or SHORT as the software credit cycle turns. Blue Owl may successfully offload risk or the software default cycle may be milder than the 2014 energy crash.
Bruce Richards
CEO, Chairman, and Founder, Marathon Asset Management
"Public private equity markets... they're going to be in a really good position to buy a lot of this at pennies on the dollar." While lenders (Private Credit) take the losses on defaults, the large Alternative Asset Managers (Private Equity side) have the dry powder to acquire distressed software companies at reset valuations (4x EBITDA instead of 10-20x). LONG the "Vulture Capital" that will feast on the coming distress. These firms also have large credit arms (Private Credit) that could suffer from the very defaults they hope to exploit on the equity side.
Bruce Richards
CEO, Chairman, and Founder, Marathon Asset Management
Richards states Marathon is focused on "HALO" assets: "Hard Assets, Low Obsolescence." He specifically lists "aircraft, maritime assets, turbines, cranes, and engines." In a high-inflation or default-heavy environment, capital rotates to tangible assets with liquidation value. Caterpillar (Cranes/Engines), GE Vernova (Turbines), and Air Lease Corp (Aircraft) are the direct public proxies for the assets he is underwriting. LONG the physical economy (Industrials) over the intangible economy. A broad economic recession would hurt cyclical industrials regardless of their collateral value.
Bruce Richards
CEO, Chairman, and Founder, Marathon Asset Management
"Software is just too much exposure... 23% of the direct lending business is software." He notes these companies lack the free cash flow to reposition for AI. The sector is facing a double whammy: technological disruption (AI changing pricing models) and a credit crunch (lenders pulling back). This leads to multiple compression and bankruptcy for mid-cap software. SHORT the broad software basket, specifically mid-cap/unprofitable names. AI adoption could accelerate growth for these companies faster than debt burdens crush them.
