A veteran high-yield debt investor isn’t excited about the prospect of a fat return on unloved software companies right now.
“One thing we are not investing in today is software. There’s a lot of software debt which has started to get distressed,” Strategic Value Partners founder and CEO Victor Khosla told Yahoo Finance at the Milken Institute Global Conference this week.
Strategic Value Partners manages about $22 billion in assets under management.
Khosla added, “When software gets troubled, it doesn’t have a gentle, oh, revenues are down 10%. The troubled software businesses can even just fall off a cliff. There is no business, and they have no hard assets … We’ve looked at it hard for the last couple of years.“
Strategic Value Partners is investing in the real economy instead. “So as a firm, we’ve always focused on manufacturing businesses, chemical businesses, things associated with home building. We own power plants, we own airplanes. We own a lot of toll roads. We own a lot of hard assets,” Khosla said.
The backdrop for software stocks: Software stocks have been obliterated this year as AI disruption calls into question once-foolproof business models.
The sell-off has touched everyone from enterprise software behemoth Salesforce (CRM) to midcap enterprise play DocuSign (DOCU). Yet even in the face of sizable pullbacks, the selling likely hasn’t peaked, RBC Capital Markets strategist Lori Calvasina warned in a recent note.
This “SaaS-pocalypse” has been driven by three primary concerns:
The democratization of development, where AI enables businesses to build custom in-house tools.
Seat compression as AI agents replace human workers and reduce the need for per-user licenses.
Growth lag, where software companies struggle to monetize AI while infrastructure providers like AI chipmaker Nvidia (NVDA) reap the rewards.
Among the biggest affected, ServiceNow (NOW) has plummeted 40% year to date. Salesforce has dropped over 30% amid concerns about its seat-based model. Adobe (ADBE) stock fell nearly 20% following the recent announcement of longtime CEO Shantanu Narayen’s departure and persistent fears that generative AI tools could cannibalize its creative suite dominance
Bottom line: If the high-yield debt investor in Khosla isn’t super-excited about the future prospects of these beat-up software companies, why in the world are you trying to pick a bottom in these equities? Come on, don’t be a hero.
Brian Sozzi is Yahoo Finance’s Executive Editor and a member of Yahoo Finance’s editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
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