Hello and welcome to the newsletter, a grab bag of daily content from the Odd Lots universe. Sometimes it's us, Joe Weisenthal and Tracy Alloway, bringing you our thoughts on the most recent developments in markets, finance and the economy. And sometimes it's contributions from our network of expert guests and sources. Whatever it is, we promise it will always be interesting.
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Here's what Tracy's thinking about
Are business development companies and private credit specialists just software wrappers in disguise?
They're certainly acting like it.
By now, everyone's well aware of the SaaSpocalypse. Less noticed -- up until recently -- is just how entwined software and a certain part of the financial sector has become. Charts of alternative lenders like Blue Owl, Runway Growth Finance, and Golub Capital have now been plunging in tandem with the sector.
Part of the problem is how murky private credit remains. Quantifying software exposure is tough. In the chart below, Bank of America analysts led by Ebrahim Poonawala have used the tech category as a broad proxy. On that basis, software looks like one of the biggest industry exposures for BDCs.
There are reasons to think that exposure might even be higher. Robert Dodd at Raymond James points out that loans to software companies are often classified by end market. So a firm offering SaaS for healthcare could show up in the "healthcare" category as opposed to "technology" or "software."
What's happening now feels, to me, like two unwinds happening at once.
First, the logic of lending to software companies has broken down. The pitch was always that ARR (annual recurring revenue) offered something steady and bond-like -- a long-duration stream of predictable payments that justified lending into sometimes negative free cash flow. But that argument depended on the belief that subscription revenues would stick. When a business model suddenly faces the risk of obsolescence, "steady annuity" morphs into a binary bet.
Second, the allure of private credit itself is starting to erode. The promised 'illiquidity premium' doesn't look so compelling when public market yields have been catching up. And the supposed insulation effect -- no daily marks, limited volatility, a sense of calm through the storm, etc. -- is harder to sell when defaults are now seen as a real risk and every headline in markets seems to be about something you have a lot of exposure to.
To use the old cliché, private credit's opacity was once a feature and now it looks more like a bug. The illusion of low correlation fades fast when portfolios overlap with the same overvalued tech borrowers that public markets have been repricing. And the prospect of taking back the proverbial keys of a defaulted company doesn't seem like much of a consolation prize either. How much value will be left in the codebase of a business that ha failed because AI could replicate its codebase? I'm guessing not much.
The irony here is that private credit -- by promising isolation and relative 'quiet' -- kind of held itself as the antidote to the tech-heavy, more volatile public market. It wanted to be the place where not much moved. But now, it’s moving with everything else.
What Joe is thinking about today
Last month's World Economic Forum was dominated by talk of Greenland and the return of great power politics on the global stage. But there was one other thing I saw that didn't get much attention.
French President Emmanuel Macron held a one-on-one conversation with Jonathan Haidt, talking about the mental health harms of social media, particularly on young people. As Macron said in a post on X: "Together, we are fighting a decisive battle: taking back control from social networks, algorithms and platforms, and protecting our children and teenagers. I have made a commitment: France will lead the way."
It's a slow moving train, but it seems clear that more and more world leaders are moving in the direction of additional curbs and regulation on social media. Our colleagues Shona Ghosh and Daniel Basteiro have a great piece up today on the growing momentum in Europe for restrictions. Speaking at an event in Dubai, Spain's Prime Minister Pedro Sánchez described social media as a "failed state" adding that "I know that it will not be easy. Social media companies are wealthier and more powerful than many nations, including mine. But their might and power should not scare us."
I've never heard social media referred to as a "failed state" before, but I think it's a powerful framing. Media has always been intimately tied up in notions of sovereignty and state. The famous book Imagined Communities, by Benedict Anderson, makes the argument that the printing press was an important technological precursor to the nation state as we know it. He argues, among other things, that the physical distribution reach of newspapers played a role in allowing scattered people to see themselves as belonging to a coherent political unit. He argues that novels have long played a role in establishing national myths and shared history.
And so now you have this technology that brings people together in groups in ways that are completely orthogonal to anything that you can draw on a map.
Meanwhile, the people who run these platforms are to some extent heads of state -- collecting tax revenues, establishing their own sets of rules, and banishing users that run afoul of them.
There's this thing you hear anytime someone gets banned from social media; that the first amendment doesn't apply to restrictions placed by private companies. And of course that's true. But I've always found that to be kind of besides the point since the big platforms are the town square; and there aren't many other places to go. And so the rules of of the platform functionally become national rules and play a role that up until recently would have be seen as the state's prerogative.
Now of course a lot of discourse at this point is being framed around mental health; particularly that of young people. But over time it seems plausible that more countries will try to go down China’s path; with its own internet; and companies subordinate to state control.
It sounds like a radical departure from norms thus far but internet’s still new—it’s just getting started. More countries will perceive these platforms as competing with national law.
The fact that imposing restrictions may serve as a way to box out or curb an industry dominated by United States is an added bonus.