Richards: Not Too Worried About Software Worries Contagion
Summary
- The "Broken" Software/Credit Link: Richards argues that the "recurring revenue" model in software allowed companies to take on excessive leverage (10x in private markets vs. <1x in public markets). He predicts a reckoning in the Private Credit sector, specifically for Direct Lenders with high exposure (industry average is ~23%) to software.
- Default Rate Prediction: While the broader market is fine, Richards forecasts default rates in the software-heavy private credit segment could hit 15% (referencing UBS data) or drive overall private credit defaults to 4-6%, dominated entirely by software failures.
- The "Physical World" Pivot: The primary opportunity is shifting capital from "intangible" software assets to "tangible" Asset-Based Lending (ABL). He explicitly favors re-industrialization, infrastructure, and physical machinery (cranes, concrete, transformers, aircraft).
- No Contagion for Banks: Unlike 2008, the banking sector holds very little of this toxic software debt; the risk is concentrated in shadow banking (Private Credit/Direct Lending).
Trade Ideas
Richards warns that Private Credit has "23% exposure" to software compared to only 3-7% in public indices. He notes these private companies are "ten times levered" and predicts "companies that won't survive this... it's just destruction." The valuation multiples for software have contracted, but the private debt loads remain high. As these companies fail to roll their debt or grow into their valuations, the equity will be wiped out, and the lenders (Private Credit funds with high software concentration) will take significant haircuts. While retail cannot easily short Private Credit, they should avoid the Software sector (IGV) generally until the "winners are sorted from the losers." AVOID/SHORT highly levered Software and the Private Credit/BDC sector exposed to it. A rapid cut in interest rates by the Fed could bail out levered software companies by lowering their debt service costs.
Bruce Richards
CEO, Chairman, and Founder, Marathon Asset Management
Richards states, "We love the physical world... concrete... roads... infrastructure building... transformers or cranes." He notes a "huge re-industrialization happening" requiring capital for plant, equipment, and materials. The macro regime is shifting from "asset-light" software growth to "asset-heavy" industrial build-outs (reshoring, AI data centers, chip manufacturing). Companies that supply the physical tools for construction (CAT, URI), the materials (VMC), and the power grid components (ETN) are the direct beneficiaries of this capex cycle. LONG "Physical World" Industrials and Infrastructure plays. A deep recession would halt capital expenditures and construction projects, hurting cyclical industrial stocks.
Bruce Richards
CEO, Chairman, and Founder, Marathon Asset Management
Richards highlights a recent "aircraft securitization" deal, noting 41% of their aircraft are leased to European/Asian airlines. He explicitly states, "We love asset based lending... whether it's airlines or airplanes." In a high-rate environment, owning cash-flowing hard assets (planes) that can be leased out provides better inflation protection and collateral security than lending against software "recurring revenue" which can evaporate. Aircraft lessors (AER, AL) fit this "Asset-Based Lending" thesis perfectly. LONG Aircraft Leasing companies. Geopolitical conflicts grounding fleets or a global travel recession reducing demand for aircraft.
Bruce Richards
CEO, Chairman, and Founder, Marathon Asset Management
When asked about contagion, Richards says, "I'm not really worried about contagion. I think the banking sector has very little exposure to software." The market often sells off banks in sympathy when "credit events" occur. However, Richards identifies this as a contained crisis within the "shadow banking" (Private Credit) world. Traditional banks are insulated, making them a relative safe haven if the market panics over credit quality. LONG Traditional Banks as a contagion hedge. Unforeseen exposure to other stressed sectors (e.g., Commercial Real Estate) could still hurt banks, even if software does not.
Up Next
This Bloomberg Markets video, published February 26, 2026, features Bruce Richards discussing BKLN, IGV, CAT, VMC, URI, XLI, ETN, AER, AL, XLF, KRE. 4 trade ideas extracted by AI with direction and confidence scoring.
Speakers: Bruce Richards · Tickers: BKLN, IGV, CAT, VMC, URI, XLI, ETN, AER, AL, XLF, KRE