Company Interview / Reassessing tech funding through private credit

Key Points:

Increase in scrutiny of private credit portfolios with heavy tech exposureOverseas vehicles like BDCs have seen valuation drops due to software sector concentrationSoftware firms present both opportunity and risk in private lendingDiversification and portfolio management are vital to mitigate concentration issues in private credit

Frank Danieli from MA Financial highlights increased scrutiny on private credit portfolios exposed to the tech and software sector, especially amid recent volatility in equity markets. Danieli points to global private credit funds with significant lending activity towards software and technology businesses, noting that shifts in equity valuations and AI-related disruption have prompted concerns about lender risk exposure. Overseas, vehicles such as BDCs, which commonly have substantial software borrower concentration, have seen notable valuation declines.

Danieli considers software firms to be attractive borrowers because they are typically capital light, high margin, and generate consistent cash flow. He acknowledges, however, that overconcentration in any sector, even one with a fundamentally sound premise, can raise vulnerabilities. In credit markets, Danieli stresses that diversification is crucial, with success hinging on minimising correlation and avoiding portfolio losers rather than picking winners.

In the Australian context, Danieli refutes the idea that private credit is heavily concentrated in tech, citing MA Financial’s private credit portfolio of almost $7 billion with only 2.9% directed toward software and development across 28 lending segments. He considers the real challenge for private credit portfolios is not the nature of tech exposure, but rather effective portfolio management and concentration risk.