Benefit Street Partners CEO says private credit’s doomsday scenario is overblown

“The doomsday scenario is a complete over-exaggeration,” says David Manlowe, CEO of Benefit Street Partners, on the latest episode of Credit Exchange with Lisa Lee. Manlowe asserts that investors will have time to see the impact of artificial intelligence, which could even help boost margins at software firms.“I don’t see a big company like, for example, Franklin Templeton, ripping out their core software system in the next couple of quarters.”The average level of exposure is around 22-23% for BDCs, Manlowe says, but among funds, there’s huge disparity. If one drew a histogram of all private credit BDCs and their ownership of software, it would range from funds focused on technology at up to 70%, while others are at 2%. BSP, the $94 billion alternative credit business inside Franklin Templeton, has around 9.5% exposure to software.Where the rubber really hits the road, is not in performance this quarter or next quarter, but when these companies have to refinance their debt, Manlowe notes. And that doesn’t really start until the second half of next year.That said, there will be some early indicators in the earlier part of the year, and every quarter to follow. “You could see, over the next few quarters, an extended period of time where some of these software companies actually see a fairly significant margin expansion, because they’re so much more efficient at how they’re writing code and deploying code, so on and so forth.”This raises a key question – how wide, and how deep, is the moat around a given software application?On the recent withdrawals from semi-liquid private credit funds, Manlowe believes the design of the product was very thoughtful around the asset class. The 5% cap ensures what’s going into the funds actually has a duration that is shorter and can fund the redemptions.“That five percent per quarter wasn’t a made-up number,” he says. “There’s something I learned through all this – maybe we didn’t educate as much as we should.“Let’s get back out educating the investor base. It’s not a product design flaw.”On the Iran war, Manlowe predicts it will have an impact on short-to-intermediate-term inflation. He is upbeat about the prospects for floating-rate credit markets in particular: “[The] underlying economy, both in the US and Europe, should be conducive to the companies that we lend to, and the companies in the market performing reasonably well.”