The takeaway: The market is discounting many software leaders 30–50% on fears that AI will displace them. Nvidia’s Jensen Huang has argued the opposite — that even the best AI agents will lean on refined, mature software tools rather than build from scratch. The collateral damage has extended to BDCs that hold first-lien tech loans, where reported loss rates are negligible, while the stocks now trade at 25%+ discounts to NAV with 11–16% dividend yields.
Dear Investor,
The stock market is showing higher volatility as we start 2026. One big issue impacting markets is the fear of AI displacing companies and industries, particularly in the software space. Ever since Microsoft captivated users with its Windows programs, software applications and companies have been growing and thriving. Many software programs have unique niches where they are basically tailored specifically to meet certain industry tasks, or they have all the data-analytics advantages of many years of utilization. Despite these positives, the acceleration of progress in AI chatbots has investors concerned that many of these dominant software companies will become obsolete.
The market is pricing in disruption that has not yet happened
Stocks such as Salesforce, Microsoft, HubSpot, Intuit, Oracle, and Adobe have been punished quite severely by the market. There was a similar narrative nearly ten years ago when companies were shifting their servers to the cloud and pivoting to monthly recurring subscriptions rather than one-time software purchases. Ultimately, most of those software companies ended up making more money, not less — and I expect that for many of the top companies today, they will use AI tools to improve their products and the experience users have with them.
Nvidia’s CEO Jensen Huang had a notable interview where he was asked about the disintermediation of software by AI. His answer: even the best AI robot or chatbot would naturally want to use the tools that already exist and have been refined over years or decades, rather than creating new ones from nothing. That is a meaningful statement from an authoritative voice on the subject.
Where the dislocation is showing up in our portfolios
At T&T Capital Management we are not heavily exposed to the software stocks, thankfully, as many are down 30–50%. We have seen some of our BDC investments — names like OBDC, OTF, MSDL, and FSK — get hit as part of the collateral damage.
Business Development Companies own diverse loan portfolios consisting predominantly of first-lien loans. They are extremely diversified across industries, and most loans are less than 1% of the total portfolio. The technology loans they do hold have been some of the best-performing loans out there. Blue Owl’s CEO recently noted that their loss rate on tech loans has been approximately 0.1% — essentially nothing. The loans are roughly 30% loan-to-value, meaning the equity cushion beneath them is substantial.
For these BDCs to take serious losses on these loans, the underlying borrowers would effectively have to see their equity go to zero — an outcome we view as unlikely for the vast majority of these companies, most of which are still growing revenues at double digits with reasonable balance sheets. Most of these loans also roll off within two to three years, so this is not a ten-to-fifteen-year exposure. Despite that, the stocks have taken a big beating, and in our view that has created a compelling setup for investors willing to look through short-term volatility. Many of these BDCs are offering dividend yields of 11–16% and trading at more than a 25% discount to net asset value.
Blue Owl Capital (OWL): the asset manager, not the credit
OWL is an asset manager that owns some BDCs along with a large assortment of other funds that have been performing well — effectively a “mini-Blackstone.” The asset manager itself is not taking credit risk, but the market has been treating it as though it is struggling, when the operating reality has been the opposite: OWL has been one of the fastest-growing asset management companies in the country, with rapid growth in distributable earnings.
We have been taking advantage of the disconnect between price and value by buying the stock and, where suitable for a given account, by selling cash-secured put options. The dividend yield is close to 8% at current prices. We think this is a name with meaningful multi-year re-rating potential if the company can continue to grow the way it has been, though such forward-looking views are inherently uncertain.
AI is going to drive real, transformational change — and there will indeed be winners and losers. But the blanket punishment of the BDCs holding first-lien debt to still-growing software businesses looks, to us, like a textbook case of the market discounting a worst-case scenario that the underlying data does not support.
— Tim Travis, CEO/CIO, T&T Capital Management
Important Disclosures
T&T Capital Management LLC is a Registered Investment Advisor. This article reflects the views of the author as of the date written and is for informational and educational purposes only. It is not an offer to sell, nor a solicitation of an offer to buy, any security. References to specific securities (including Salesforce, Microsoft, HubSpot, Intuit, Oracle, Adobe, OBDC, OTF, MSDL, FSK, and OWL) are examples of positions the firm or its clients may hold and are not recommendations to buy or sell any security. Yields, discounts to NAV, and loss-rate figures are approximate, as reported by third-party issuers, and subject to change. Options transactions (including cash-secured put writing) are not suitable for all investors and involve risk, including the risk of being required to purchase the underlying security at the strike price. Past performance is not indicative of future results, and forward-looking statements — including multi-year return potential — involve risk and uncertainty. Please read our full firm disclosures before acting on any information contained herein.
