Famous hedge fund manager: Software debt crisis could erupt solely due to AI fears

Hamza Lemssouguer, founder of credit investment firm Arini, which manages over $17 billion in assets, warned that even if AI has not yet had a substantial impact on the software industry, the panic in the market alone is enough to drive up corporate financing costs and ultimately trigger large-scale defaults.

On Tuesday, Arini founder Hamza Lemssouguer stated:

"We don't need to wait for real disruption to occur to see where the problems are. The market is always ahead. The most immediate risk right now is a large number of companies facing rising capital costs, which will ultimately lead to widespread defaults, credit market turmoil, and dislocation."

This warning comes as the software industry faces weeks of continuous sell-offs. Investors worry that the rapid evolution of AI technology will fundamentally threaten the business models of software companies, which generally carry relatively high levels of debt compared to their earnings, and their funding sources rely heavily on private credit institutions.

Direct lending institutions reducing exposure, impact could be even more severe

The debt structure of the software industry makes it particularly vulnerable in the current environment. These companies generally operate with high leverage and rely heavily on the private credit market for financing. As market sentiment shifts, Blue Owl Capital has closed redemption channels for one of its funds and has been forced to sell assets after investor withdrawals, marking a symbolic event of the industry's pressure.

Arini founder Hamza Lemssouguer pointed out that as direct lending institutions actively reduce their exposure to the software industry, the shock may intensify further. He believes that the private credit industry’s concentrated bets on the software sector have already become excessive, and he stated:

"The level of concentration should not reach that of software in direct lending. For a mediocre-performing lending industry, lending at this level is unwise."

Private credit has reached $1.8 trillion, timely regulatory attention

Arini itself also employs a direct lending strategy but has extremely limited exposure to the software industry. Lemssouguer said he welcomes regulators’ growing attention to systemic risks in private credit.

He pointed out that the private credit market has rapidly expanded in recent years, now reaching $1.8 trillion in size, which is enough to warrant regulatory attention. He stated:

"Given its scale of growth, I think private credit is now large enough to deserve attention and surveillance, and it is also healthy in itself. Every sector experiences such cycles, and I think it’s now private credit’s turn."

He also emphasized that stricter regulation does not mean fewer investment opportunities, but the industry needs to face the balance between risk and return, saying:

"This is an asset class with risk, opportunity, expected returns, expected defaults, and expected losses."

Risk Disclaimer and ExemptionsThe market has risks, and investment needs caution. This article does not constitute personal investment advice, nor does it take into account the unique investment goals, financial situation, or needs of individual users. Users should consider if any opinions, views, or conclusions in this article suit their specific situation. Investing based on this is at your own risk.