#Why is Apollo Global Management Reducing Software Investments?
Apollo Global Management, one of the largest alternative asset managers globally, is reassessing its software investments, and the timeline for this adjustment is accelerating. Over the last 18 months, the firm has steadily reduced its stakes in software, driven by a prevailing concern that artificial intelligence may significantly disrupt this sector. Apollo aims to decrease its software holdings within direct lending funds from about 20% of net assets in early 2025 to below 10% by early 2026.
This shift reflects a strategic response to significant changes in the market environment. Recent analysis indicates that enterprise software-as-a-service (SaaS) revenue multiples have experienced a drastic decline of 38% within just six months. This downturn is largely attributed to the rise of generative AI, which is commoditizing critical functions that ongoing SaaS companies previously charged premium prices for.
#What Risks is Apollo Facing?
Apollo has identified three primary risks influencing its decision to pivot away from traditional software investments. First is commoditization, as AI-driven tools are emerging that can replicate core functionalities of established SaaS products at a lower price.
Second, there is erosion of pricing power. Historically, SaaS companies enjoyed significant pricing power due to high switching costs and limited alternatives. However, the capabilities of AI are dissolving these advantages.
Third is the competition posed by AI-native startups. These enterprises are not merely enhancing existing products with AI but are built from the ground up to leverage AI, which provides them with distinct cost advantages and innovative product philosophies.
For a financial giant like Apollo, these risks complicate matters. If a borrowing company's revenues plummet because AI has encroached on its market, its ability to manage debt is compromised. In private credit, where loans are typically illiquid and held until maturity, such a scenario can be particularly damaging.
#Is This a Retreat from Technology?
Despite these challenges, Apollo is not withdrawing from technology altogether. The firm has clarified its focus on pursuing AI investments beyond traditional software domains. Areas such as data centers, power generation, and the infrastructure that supports AI are perceived as essential to future growth and stability.
Apollo is also concentrating on enhancing AI capabilities within its current portfolio companies to ensure they are well-positioned against impending market disruptions. Furthermore, Apollo has a dedicated division known as Apollo Crypto, which strategically invests in blockchain, decentralized finance, and AI infrastructure. This division operates independently from the firm's software strategy but underscores the belief that technology is reshaping financial systems. Being positioned correctly within this evolving landscape is crucial for any investor.