I don’t think anyone will be shedding a tear for the declines in private equity stocks but
- Blue Owl (which is notorious for software loans): -6%
- Jefferies -10.3%
- Apollo -8.4%
- KKR -7.3%
- Ares -7.1%
- Goldman Sachs -7%
- Morgan Stanley 6.6%
The fundamental pitch of private equity is leveraged lending and buyouts. There were buyouts of software companies and clients of these firms are holding unlisted shares in these companies.
What are those companies worth now? Many of them aren’t even making any money but had large multiples of revenues but suddenly those multiples are collapsing. Even if companies are good, they’re getting tossed out because software is toxic.
Now some of these companies (like Blue Owl) will argue that they’re lending against 30% of the value of these companies on terms of three years or less. But even if those loans turn out ok, the refinancing terms are going to be brutal in 2-3 years, if they can finance at all. Software companies don’t have assets to borrow against so the private ‘equity’ side will get wiped out if any of these loans end in default.
One of the parts of the market that are going to get caught up in this is life insurers and college endowments who were hoodwinked by private equity into taking allocations to software. They’re even getting caught in the cross fire.
What’s particularly tough in all this is how opaque it all is. That makes it tough to find a bottom or get a sense of how things are changing in real-time. Even results of public companies are being ignored because the market is looking 1-2 years out on a presumption of AI disrupting them.
Why today?
The trigger today was that UK firm MFS failed. It’s a mortgage lender but warned there could be a $1.3 billion shortfall in the collateral backing their loans, partly through double-pledging of assets. Barclays, Jefferies and Apollo’s Atlas are among their lenders, arguing that loan due diligence has been lackluster.
If that’s the case — or if fraud is widespread — then the losses could be huge. Jefferies was also exposed to First Brands last year, which collapsed in fraud.
Looking at the shares of private equity, there is some real fear unfolding. KKR is down almost 50% from early 2025 and is threatening to take out the Liberation Day lows.
The KKR chart is scary
As Warren Buffett famously said:
“When you see cockroaches in the kitchen, there are probably a lot more in the walls.”
For now, everyone is throwing out the kitchen sink.
The line here is whether these losses are going to be held in proper banks or just private equity. The drops in bank stocks today are worrisome.
Long time Wells Fargo bank analyst Mike Mayo highlights that it will be six weeks before bank earnings and that right now everyone is “guilty until proven innocent” though he thinks the large banks will be fine over a one-year horizon.
