Blue Owl says software's AI woes are for equity investors, not lenders like itself [Business Insider] Skip to main content

Blue Owl says software's AI woes are for equity investors, not lenders like itself [Business Insider]

In the chaotic world of private credit, where the lines between traditional lending and venture-style risk have blurred over the last decade, Blue Owl Capital is drawing a very clear line in the sand. The firm, one of the largest and most influential direct lenders in the world, is sending a pointed message to the market: the turbulence and potential losses tied to the artificial intelligence software boom are a problem for equity investors, not for the lenders who hold the debt.

The AI Software Paradox: Growth vs. Cash Flow

For the uninitiated, the AI software landscape has been a tale of two realities over the past eighteen months. On one hand, you have the infrastructure giants—the Nvidias, the hyperscalers, and the chip fabricators—who are raking in billions as the picks-and-shovels providers of the AI revolution. But on the other hand, you have the software companies themselves, the thousands of startups and mid-cap firms trying to build the actual applications. Many of these software companies are burning cash at an alarming rate, chasing market share in a hyper-competitive environment where customer acquisition costs are sky-high and monetization is often deferred.

This has created a classic tension. Lenders who provided capital to these software firms during the low-interest-rate era of 2020-2021 are now facing a reckoning. Some of these borrowers are running out of runway. Others are seeing their valuations slashed in half. The narrative in the financial press has been one of caution, suggesting that the private credit market is about to get a nasty surprise from the AI software hangover.

David Weisburd, a venture capitalist and commentator on the private markets, recently highlighted this dynamic in a post on X, noting that "the private credit market is about to learn a hard lesson about software lending." But Blue Owl is pushing back hard against that generalization.

Blue Owl’s Unflinching Stance: We Lend to Cash Flow, Not Hype

During a recent investor call and in subsequent conversations with analysts, Blue Owl executives made it crystal clear that their software lending strategy is fundamentally different from the venture debt model that is currently under stress. The firm’s argument is simple: they are not betting on future unicorns. They are lending to mature, cash-flow-positive software businesses that happen to be using AI as a tool, not to speculative, pre-revenue AI startups.

“The concern around software lending is real for certain pockets of the market, but it is not a Blue Owl problem,” a senior executive reportedly told investors. “We are not lending to companies that are burning cash to build AI models that may or may not work. We are lending to established software platforms that have recurring revenue, high retention rates, and predictable cash flows. The AI component is an add-on, not the core thesis.”

This distinction is critical. The firms Blue Owl targets typically have enterprise value-to-EBITDA ratios and debt-to-EBITDA leverage levels that are far more conservative than those of the typical venture-backed AI startup. They are lending against the stability of an existing software franchise, not the speculative value of a future AI breakthrough.

Why the Distinction Matters for Investors

For the average retail investor or limited partner allocating capital to private credit, this distinction is the difference between a safe yield and a potential loss. The broader private credit market, which now exceeds $1.7 trillion in assets under management, is often painted with a broad brush. When headlines emerge about a troubled AI software company defaulting on its debt, it creates a ripple effect of fear across the entire asset class.

But Blue Owl is essentially telling the market: “Read the fine print.” Their loan book is heavily weighted toward what they call “asset-light, cash-flow-heavy” businesses. These are companies like tax preparation software firms, HR management platforms, and enterprise resource planning systems that have been around for a decade or more. They are using AI to automate workflows or improve customer service, but their business models do not depend on the success of a speculative AI product launch.

This is a classic risk management play. By focusing on resilient, recurring revenue models, Blue Owl is insulating itself from the volatility that is inherent in the venture-backed AI ecosystem. The firm’s default rates in this segment remain significantly below the industry average for software lending.

The "Credit Moat" in a Volatile Market

The argument Blue Owl is making is essentially about creating a credit moat. In a rising interest rate environment, and with the economy showing signs of slowing, the ability to differentiate between truly risky software lending and conservatively underwritten software lending becomes a massive competitive advantage.

Many smaller lenders, desperate for yield, have been forced to take on more risk. They are lending to AI companies with thin revenue streams, betting that a growth spurt will save them. Blue Owl, with its massive $230 billion asset base, has the luxury of being picky. They can walk away from a deal if the leverage is too high or if the cash flow isn't there. This discipline is what allows them to sit back and watch the equity investors in those risky AI companies take the haircuts.

In fact, Blue Owl’s stance suggests that the real pain from the AI software correction will be felt in the equity markets—by venture capitalists, angel investors, and public market shareholders who bought high. Their loans, secured against the hard assets and recurring revenues of stable software firms, are designed to weather the storm.

The Bottom Line for Readers

So, what does this mean for you? If you are an investor in Blue Owl’s funds, the message is one of reassurance. The firm is telling you that its exposure to the most speculative corners of the AI market is minimal. If you are a competitor in the lending space, it’s a warning that the market is bifurcating: the safe lenders are getting safer, and the risky ones are about to get punished.

The AI revolution is real, but the financial structure around it is messy. Blue Owl’s bet is that they can collect their interest payments while the equity holders fight over the wreckage of the companies that couldn’t make the transition. It’s a classic lender’s playbook, and in a market full of hype, it’s refreshingly boring. And in finance, boring usually wins.

As the dust settles on the AI software correction, the winners will be those who understood the difference between lending to a business and gambling on a technology. Blue Owl is making it very clear that they are in the first camp.

Ahmed Abed – News journalist

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