Private equity’s doomsdAI moment

One scoop to start: Jes Staley was named as a trustee of Jeffrey Epstein’s estate up until at least 2015, newly released documents show, which appear to undermine court testimony from the former Barclays boss that he turned down the role. 

In today’s newsletter: 

Private capital’s software problem 

Private markets weathered the storms of interest rate rises and US President Donald Trump’s “liberation day” tariffs without facing the reckoning many had expected.

But as fears about AI upend the software sector, the wrecking ball may have finally arrived for private markets, DD’s Antoine Gara and Eric Platt report in a Big Read.

Private equity was already facing a crunch. PE firms, unable to sell or list assets, sold to themselves at record rates last year. With the sector already struggling to return money to investors, the software downturn imperils what had been the hottest area of private markets.

Stockpiles of software assets have grown as such buyouts were the single biggest category of private equity dealmaking over the past decade, by some estimates accounting for about 40 per cent of trillions of dollars in deal activity.

Two firms, Vista Equity Partners and Thoma Bravo, fuelled the boom.

In the wake of the 2000s dotcom bust they bought up mid-sized software companies selling cyber security, or services to niche industries, and delivered returns that trounced those of larger, established funds.

As rival PE firms attempted to replicate their success, software deals surged from just a few billion dollars annually before the crisis to hundreds of billions of dollars beginning in 2020. Meanwhile, Vista and Thoma saw their assets collectively rise to about $300bn from less than $3bn before the crisis.

But now the rise of AI threatens their ability to turn those massive investments into profits.

AI fears reached a fever pitch this month when Anthropic released a new AI model, Claude Opus 4.5. Software companies have plunged as many question the business model of selling specialised software services to corporations.

While some companies may see an upside from AI adoption, exiting expensive AI investments could be tricky for PE-owned software groups that are already highly leveraged.

Meanwhile tech groups SpaceX, OpenAI and Anthropic are all preparing for blockbuster IPOs, potentially crowding out private equity firms attempting to sell or list software companies. Who will buy leveraged, slower-growing software groups when they can have a slice of the likes of SpaceX instead?

Private credit groups may have a lot to worry about too. The software takeover spree was fuelled by the emergence of a high-octane lending market, which helped cause takeover valuations to soar as lenders lubricated deals. Software takeovers represent nearly a third of private credit lending.

“[Software] is the largest exposure in every one of the largest private credit funds,” one finance executive told the FT.

The thinking among many lenders has been that they’re more insulated from the software downturn because their loans will only take a hit if very large equity cheques are wiped out first.

DD isn’t sure that’s bulletproof thinking. If AI does prove to be a problem, the fact that private equity firms have sunk a ton of money into an obsolete company doesn’t help much in a restructuring. Lenders can also only bear to lose so much, while PE firms may see big winners and losers in the AI era.

This was Apollo Global’s thinking last year as it cut its exposure to software companies.

“Technology change is going to cause massive dislocation in the credit market,” said Apollo chief executive Marc Rowan at a conference. “I don’t know whether that’s going to be enterprise software, which could . . . benefit or be destroyed by this. As a lender, I’m not sure I want to be there to find out.”

Finally, many private credit funds have open-ended funds that allow investors to redeem their investment, an area of rising industry pressure. 

Elliott’s plan for the AI revolution

Just as the market is running away from software and data stocks, activist hedge fund Elliott Management is in typical fashion running head first. 

Elliott has built a significant stake in financial data giant London Stock Exchange Group, the FT revealed on Wednesday. It has been encouraging the FTSE 100 owner to boost its share buyback and improve its profitability in order to turn around its performance. 

Last week, LSEG was buffeted by marketwide jitters over the impact of AI on data providers. Its shares are down about a third over the past year.

In some ways, LSEG has all the elements of a classic activist break-up thesis. Best known as a share-trading house, LSEG’s £22bn acquisition of Refinitiv transformed it into a multipronged conglomerate, which runs market indices, sells data and analytics services and owns a roughly £10bn stake in electronic trading platform Tradeweb. 

Selling off parts of the business could help LSEG boost its valuation multiple, which lags far behind competitors such as Moody’s and CME Group. Elliott, however, has stressed that it is not pushing for LSEG to sell its London Stock Exchange business. 

The most fundamental question for the stock is whether the AI revolution will be friend or foe. On the one hand, investors have baulked at the stock following the launch of the new Claude tools. On the other hand, the company has struck partnerships to funnel proprietary data to Anthropic and Microsoft, which could generate new revenue streams.

LSEG’s chief executive David Schwimmer has been resolute in his response to concerns over AI, telling investors in October that “AI cannot replicate or replace our real-time data”. 

Will he be as resolute in his response to Elliott? The first signal will come at LSEG’s annual results at the end of the month. 

The UK pension struggling in private markets

The insolvency application for broadband provider G.Network last month was the latest blow to the £77bn Universities Superannuation Scheme, the UK’s largest private pension fund, which had invested close to £300mn in the “altnet” upstart. 

It comes on the heels of a disastrous £1bn writedown in USS’s holding in Thames Water in 2024 and a failed investment in battery maker Northvolt, which filed for bankruptcy last year. 

But what of the rest of its private markets holdings, which account for about a third of its portfolio? 

It’s hard to tell — because USS does not split out performance and rarely comments on individual assets. Chief executive Carol Young said on a rolling annualised 10-year basis, the private markets group’s performance was “consistently in the high single-to-low double-digit ballpark”.

Still, annualised headline returns have been 1.7 per cent over five years and 3.9 per cent over 10, which one pensions expert told the FT was “frankly abysmal”. But USS’s funding position has improved over that time because of rising bond yields.

A key reason for its sluggish returns in recent years appears to be a sharp increase in its hedge ratio — now about 50 per cent. 

USS argues the portfolio is now much more resilient. Others aren’t sure its lacklustre returns justify one of its members of staff reportedly earning more than £2mn in its last financial year.

Job moves

• Latham & Watkins has hired Benjamin de Blegiers, Daniel Zerbib and Gauthier Martin as partners as well as Alexandre Namoun as an attorney in Paris. The private equity team joins from Clifford Chance.

• Weil, Gotshal & Manges has hired Kamyar Abrar as a partner to co-lead the private equity practice in Germany. He rejoins the firm from Willkie Farr & Gallagher.

• Warburg Pincus has hired Ralph Haupter as an external senior adviser to its European technology team. He is an executive at Microsoft.

• xAI co-founder Jimmy Ba, who has led research, safety and enterprise efforts for Elon Musk’s AI start-up, is leaving the company. He’s the sixth founder to leave out of the 12-person group who launched the company in 2023.

Smart reads

Locked out A New York hedge fund and Morgan Stanley worked with a Russian oligarch’s family trust even after he was sanctioned, Bloomberg reports. Other US groups have recently faced government enforcement for their dealings with the “Russian Gatsby’s” family trust.

Smart listen Elliott Management’s already complex deal to acquire an oil refinery business from Venezuela was further complicated by Trump’s capture of the country’s president. Hear how the story might end on the FT’s Behind the Money podcast.

Credit cockroach When BlackRock purchased the private credit lender HPS last year it also inadvertently acquired a massive alleged fraud, The Wall Street Journal reports. Invoice factoring strikes again.

News round-up

Activist investor takes aim at Warner Bros deal with Netflix (FT)

Castel family launch court battle in effort to oust top bosses (FT)

Kraft Heinz halts break-up plan as new chief targets turnaround (FT)

Susquehanna-backed crypto lender BlockFills halts client withdrawals (FT)

Monte dei Paschi director resigns after insider trading allegations (FT)