"Big Short" investor Steve Eisman said that while it's unclear how turmoil in private credit will ripple through the broader economy, software-related exposure within that market has been "obliterated."
"If you're a private equity firm and you have overexposure to software, your company is worth less than half. Period. There's no argument about it," Eisman said in an interview with CNBC.
He believes that the private markets sector is over-exposed in the software sector. He cited an Ares Management report which stated that 85% of their software exposure is fine, but 14% is medium risk and 1% is high risk, as reported by Bloomberg.
"The problem is that when you say 85% is fine, what you mean is that the companies are performing and are paying their interest. That's not the issue," he said.
To illustrate his point, Eisman used the example of cloud computing company ServiceNow, (NYSE:NOW). Shares of the stock are down 60% from its peak. The stock experienced a 17.8% decline earlier this month following earnings. The decline was attributed to fears regarding AI-driven competition, margin pressure from acquisitions and deal delays in the Middle East.
"The issue with these companies is that even if they are fine, when it's time to get them refinanced, who's going to want to lend to them when the equity is less than half. That's what's coming. The equity value has been obliterated," Eisman said.
On the topic of private credit, which has seen market turbulence amid investor concerns about artificial intelligence and software, Eisman reiterated industry-wide sentiment that the problem is not systemic.
"Even if it creates a credit cycle, it’s not systemic because the banks are better capitalized than they probably even have been in their history. I don't sense a systemic risk," Eisman said.
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