'Carried No Interest' warns of a looming 2028-2029 software PE debt crisis accelerated by AI disruption

multiple offers back to back that were not the best and final. But

quickly let me tell you everyone about Lambda. Lambda is the super intelligence cloud building AI supercomputers for training and inference that scale from one GPU to hundreds of thousands. And without further ado, we have carried no interest, the anonymous ex user with the most fantastic profile picture. How are you no interest?

Doing pretty well.

I'm going to repeat carried no interest as many times as possible so that I don't say your real name. Carrie, I'm going to say your real name. Good to have you here, Carried. Thanks for taking the time to join the show. Uh why don't you tell us what's been on your mind lately?

Well, it uh it feels like the chickens are coming home to roost in old private credit software land and going to take a little cheeky victory lap here and say,

"Who could have predicted this? Who could have

No one could have predicted this except you." On December 12th of 2024, you wrote a post called the bubble in software private equity private credit edition and you did a deep dive on a ton of lending data and discovered you said some hilarious stuff.

You said for a while there have been rumors forming that a bubble in private credit related to private equity.

Uh I'm somewhat certain a mini bubble forming in software, private equity, private credit and then you get into it. So what were you what were you seeing back then that uh prompted the post?

So what I was seeing right and and it's wild that kind of a a nameless private markets investor with a pitchbook subscription no intentional advertisement for them just there was able to pull this data and do it themselves but anybody with a pitchbook sub could have done it. What what prompted this is that I was simply being shown deals by investment bankers where the financing structure I think would make the average American kind of scratch their head, right? Like if you had told the average person on the street that you could take a business with $100 million in revenue uh and no profit and lever it up to buy it with no profit at all and have to repay a good chunk of it in four years, your average America would go, "No way. That's not a thing that you're allowed to do." Right? Uh but depending on how good your relationship was with a certain subset of of private credit lenders, that is certainly a thing that was allowed to do. And so what prompted the post was that I kept being shown deals with with financing structures I I could not believe, right, from very good sponsors historically who were excellent. And then I thought to myself, you know what? I'm just going to call this D pitch book, do this thing myself. And what I found was this giant bar in the years 2028 and 2029 where a lot of my uh wonderful colleagues in software private equity would have to pay a good chunk of that debt back. And it kind of terrified me because something else was happening at the same time that was somewhat scary which was you could see on a there are a bunch of different investment banks who have published this

Carl Square a bunch of the other ones that are software boutiques. You could see on a graph that the multiple on ARR was coming down in private market transactions. let's not even talk about Publix which now become more relevant than ever and I kind of looked at that graph and the graph of all the debt coming due and uh you know my stomach churned a little bit and then I wrote

and so and so the the sponsors their idea was hey the debt's going to come due in 2028 or 2029 but we're going to roll it over and we'll just kick kind of kick the can down the road but then now with AI uh disruption and a lot of questions people aren't going to want to lend uh in the same way to these businesses.

I mean the irony is it all kicked off with interest rates back in like 2021 and 2022 and you could see in the post right from Carl Square in 2021 right the the a unprofitable growth software company and Carl Square's own investment banking data traded at 9.1 times ARR in 2022. I'm so excited to hear what sound you use next. In 2022 it was 3.4. So you went from nine times Yeah, there it is. That was very good. Very, very mature. You went from 9.1 times a RR down to 3.4 times a RR. And you can even like how much software M&A took place in 2020 and 2021 that was sponsor back. It was a lot. Who is in control of

I am sorry. I'll stop.

Oh wow. You're really good at that, man. Yeah, there you go. And so it's kind of scary now. We have, you know, 30% of sponsor back transactions with software at one point and everybody's been kind of kicking the can for a while and now everyone is noticing.

Okay. Take us take us back and explain like are when I when I think about these like software deals, take privates or buyouts of private companies and there's debt involved. I go back to like the LBO, boom, the milking era, Barbarians of the Gate. Uh, obviously those were big deals. Is that the correct structure that I'm thinking of? It's just LBO, but instead of like a cigarette company or a food company or some other industrial company, it's a software company now. And and then after some of that history, I want to know like what is fundamentally different about these software deals because that LBO boom seemed to last for decades.

Yes. Yeah. And so I think that it all comes down to the fact that they were borrowing against ARR and not Evida, right? There's there's very little profit to borrow against with a high growth, you know, enterprise software company. And so what do you do? You need to juice your IRRa somehow. So you need to borrow So, you'll go to a bunch of private credit funds and you say, "Look, I've never lost money." I'm talking about a very specific firm right now. I've never lost money on a deal. You can't lose with me. Just let me borrow against the ARR and before it comes due, you know me, I'm going to sell it and we're all going to buy, you know, another GF stream and we're going to laugh about this next, you know, in four years. The problem was is that the liquidity just left, right? both in terms of the most important person who could buy it, which was a strategic acquirer, right? When stock prices fell and interest rates went up, you're just not as inquisitive. But now you lump in the fact that AI is creating all these existential questions for enterprise software companies.

Yeah.

And you have the depressed uh public valuations.

Yeah.

You know, and you have no profit. So your recovery rate with your lender might even be low. Sure. Right. You can't even you can't even take the keys of this business and milk it for dividends.

You have to do a massive restructuring. That's a really scary proposition.

Did you did you did you see the the the AI disruption of enterprise software coming or did that hit you like a flashbang?

I mean I did but I was also an AI or data scientist as you know for for many years. So I thought it was somewhat inevitable. That was

throwing flashbacks.

Yeah. No, no, to to almost said your name, Car's uh credit, this this time last year, you were talking about uh a specific product category, and you were saying, you know, 10 years ago to build a product in this space, I would have needed to raise $30 million to build something competitive. Now, I can do it with 300 grand. Yep. and I'm gonna go out I'm gonna go after it. You were working on some deal.

Yeah.

At the time. And so I think you did, you know, uh I don't know about on on December 12th of 2024, but certainly at the very beginning of 2025, you were seeing that like, hey, a lot of these uh companies that that previously would have taken, you know, tens to hundreds of millions of dollars to like rebuild and actually be competitive with, you can now do with with much less capital.

Oh, 100%. And I mean, I think that that is kind of uh I think that and here's maybe even a spicier take that I swear I'm going to write a longer post on.

I think a lot of the stuff around, you know, a really good enterprise software company is cooked because somebody's going to vibe code it. I don't think that's going to happen, right?

I think that the scarier thing that's occurring now for private equity is actually is actually that we're hearing rumors of customers that aren't signing freeear deals, right? The entire basis of software PE being some of like one of the best private market categories was that you had enterprise customers with three-year contracts.

Sure.

If every other enterprise customer says actually AI is just so amazing now and we don't know where we're going to be and what it's going to look like, we're only doing one-year deals.

Okay,

that has like much bigger implications than you know somebody vibe coded a notion clone on like a Sunday,

right? That's a big deal. And I think that the reason that that they're doing that and this is the bigger threat I think to a lot of these companies is the adjacency within the market map. Like if you look like Ripley and you have a very talented like group of people like Riplings, Ripley's employees, they can attack so many parts of the HR platform space now that they simply couldn't three years ago.

Sure. And I think that's a lot scarier than the vibe coding to my colleagues in South Private equity than, you know, somebody just whipping one of these up and going out with a bunch of cold emails. It's the adjacency threats in the market map. Scary because now who's going to go after? I don't know.

Yeah. Yeah. Yeah. Yeah. And and and so you have like previously there was like it's not an a like a HR company. It's like HR for hospital or HR for golf courses or some sort of narrow niche in a niche. And that all of a sudden is been pretty easily added to Ripling's TAM for example.

Yep. Okay. And you know, and another thing that I'm seeing just when I talk to people in the industry, I don't know that there's a scarier seat right now than at Toma or Vista

because the liquidity is just evaporating. The the appetite in the public markets gone. the ability for these mega these mega technology companies to do splashy 15 times ARR acquisitions for 15 billion dollars gone that's a really scary

all your yeah all your you know the the hyperscalers want to put money into capex or like various like you know core AI bets the public markets are going to put a massive discount because they don't know what you're going to be doing in in 10 years or even three years there's so much uncertainty and who wants to buy these companies at at least the the marks that that they've had over the last few years because of that same uncertainty. So, it's like where where do these companies go? They they you know, the funds can continue to do continuation vehicles, but it's just like everyone is just kind of kicking the can down the road forever.

You know, it's a it's a scary time in the asset class. I don't think that there's, you know, I I think that there's going to be a massive kind of resurgence of super ops focused software funds that might even be far more AI focused than than we could imagine, right? Where you have PE funds where 50% of management fees is going to AI professionals. I could see that very near term.

Yeah. What's your read on uh partnerships between the labs and the private equity firms? We've seen a bunch of those happening versus like starting a new private equity firm that is like quote unquote AI native.

Oh, I mean I think that yeah, not to use the cliche, but like it has to be like founder mode from the top. Like you can't be trusting open AI to make your for coast more money. I I think that it needs to be very much from the top of the firm really understanding what AI is capable of because I don't know how many times in history that it used to take five years to build a factory. Now you can build it in two weeks,

right? That's the scenario. You probably want an expert in factory building at the top of the fund, right? Or near the top. Um, and the rumors are that there's been a very slow adoption uh at some of these funds that were just used to zer and they were they were rolling in it, right, for 15 years. And

I don't complacent. And and when you say slow adoption, slow adoption for AI, like actually pushing AI first initiatives across their portfolio companies,

100%.

Like not the deal teams, but the the actual operations teams. Yeah.

So, so you know, you own, you know, six different businesses that are doing 30 million low end of ARR. Yeah.

How involved is your deal team in I'm not even talking about AI adoption and the ops level. I'm saying

full-blown AI adoption across both product and ops. And I think that if you're not doing that, you're going to be in big trouble in like three or four years.

What's the What's the takeaway from Mark Leonard's, you know, kind of half retirement last year? It felt like

in many ways he he like perfect I don't know if he he didn't he didn't like his exit didn't top ticket it but he bailed right as there was going to be kind of like infinite questions around the sustainability of the the model that that got them to that point obviously built a you know fantastic collection of of software companies. Well, here's the trick. You know, Constellation never overpays.

So, like they didn't do what in my opinion firms like Vista and some others did, which was borrow and pay large ARR multiples for unprofitable businesses. Like constellation does not pay frequently more than six times even for a software company. Yeah.

And price is like such a good insulation.

So, if you just assume assume like a certain gross retention and you pay a certain price, constellation is is is likely safe. Yeah,

I think that I think that they they face the same threat that others do in the adjacency of the market map, right? But their risk is much lower simply because they never overbay,

right? So

how how are you seeing like diffusion amongst these like sort of deeper in the economy software companies where the small business that they sell to might not be tracking the latest frontier model development? Oh, 5.4 nano launch today. I can cut my cost. They're just like, yeah, my business is is, you know, golf courses and I need to pay my employees. So, I'm just on this particular platform and I don't even take calls from competitors because it's just so far down the stack. It's only 1% of my cost here. I don't think about it. uh like is there a world where because AI takes time to diffuse there's a whole bunch of humans in the loop that uh some of these software companies are actually just stickier than we expect them to be even though on on principle they should be disrupted faster

I 100% think that we are overestimating the the rate of churn right I think that that is pure timeline nonsense as somebody who sees I was just going to write this like cuz I was like actually getting frustrated. Yeah,

I literally see these company financials, you know, I've seen them many times.

I'm not seeing this alleged vibe code churn yet,

right? It's just not showing up.

Horse horse carriage manufacturer says, "Order order flow looks great. We have a big backlog. There's no issues."

Sure. like and maybe at some point you're going to see, you know, every other, you know, middle market electronics distributor rolling their own ERP, but it's not happening right now. And so I try to keep like a check on my colleagues in other industries, right, that are non tech. And I literally like once a month I just say, are you going to roll your own ERP this month? And the answer is always no, right? And at some point that answer will start to shift and then one or two will do it. It will go horribly and then I will

but the but but people people have, you know, VCs are still funding AI native ERPs, like they're funding more ERPs,

but I so so I don't think the question has ever been I I haven't seen anyone saying all, you know, you know, these like core system of record businesses are totally cooked. it's every other it's the next you know 50 pieces of software that might integrate into said ERP that there's a big question mark around.

So this actually circles back to this actually circles back to um uh what I was saying before right

it there's a reason I said like half of your half of your like deal team if you're in PE should have some level of AI expertise because of that exact situation. That's actually what I'm talking about.

And and sorry for To clarify there, deal team, you mean evaluating the transaction, setting the price versus the operations team that's actually going to go and work with management, jump on the board.

Depending on

Great question. Depending on the size of the fund, those could be the same group or they could be separate. But no matter what, there should be a good amount of either AI first developers or just like AI first product people that are helping your portfolio companies compete as the VCs subsidize the CAC of the next wave of quote unquote AI first replacement. Right. Yeah. Because my my my like default assumption would be okay. Yes. You need your deal team to be able to understand what modes are AI resistant, what aren't, like re-evaluate the the prices in the AI era, but then the real AI expertise of selecting products, advancing software development workflows, figuring out the right structure of the team mix, like that's going to be much more on the operational side of the of the folks that you deploy into these companies, the management teams that you hire.

Yes. like an investment banker, no offense to my pals in investment banking, is not going to help your port codes be like, you know, AI first competitor proof. That's not going to happen. That's your biggest existential threat, right? So, you know, I think you're going to see a re reshuffleling for the best firms that can see what is so clearly the future of ops around that to deal with all these AI first, you know, YC and and and ventureback competitors. Um, I I think that's inevitable or you're you're going to be in trouble. I think another side of it is is I think that you're going to see a lot of point solutions not trading hands at good multiples,

right? I think that you will see a big flight to pure missionritical software and PE whereas I saw plenty of point solutions changing hands.

Sure.

In 2023, 2024 now

I I don't I don't see them trading and and I don't I think you can't underwrite that risk for your LPS. You simply can't. If I can swap it out in 12 hours, I I don't think you can use your LP money on that in private equity.

How how existential do you think everything that we're talking about is for like the big platform software PE funds? Like do you think do you think they can, you know, uh eventually figure out how to exit some of these businesses? they have some funds that that you know underperform or lose money but then but then they're able to kind of reposition or do you think it's it's just it's over?

I I don't know man. It it's not looking good like I mean you the public markets are are saying are telling us what the appetite is for these latest stage software companies without massive AI tailwinds and it's a very scary proposition. I I I don't see a shift barring interest rates going down and everybody jumping back into the casino. I don't I don't see it, but I've been wrong before. So,

well, the good news is interest rates are going up the last couple.

Perfect. This is going to be great for everybody. This is going to be wonderful.

Uh but yeah, I think it's existential. I think there's no doubt about it. There's there's no seat I would want less than at one of the bigger software PE funds right now. Scary stuff. And the rumor is that a lot of people are are looking looking for the doors. So,

what about uh what what about other stuff that's like software adjacent, AI adjacent? Like we've seen a lot of the the private credit funds do deals for you know large AI data centers and that feels like a complete balance against um like um you know people are people are worried about software PE debt, but then if that firm has a you know some contract with Meta for some big data center like Meta seems like they're going to be able to pay that bill. Well, it's funny you say that. I think it all comes down to the recovery rate, right? Like, you know, if if the recovery rates are poor enough, there will be nothing that that Daddy Zuck can do to save him, right? There's nothing he can do, right? If

his his his uh his uh data center bill on time,

well, yes, but but there there will be very little to hide from the recovery rates are really low. I I don't know what those are going to look like, right? And and there's a whole new asset class coming in my opinion. What's that? Of of of software special situations that's eminent, right? And you can think about a deal structure that that would look like. And this is actually a really fun thought exercise, right? So you have a software PE fund that was overlevered, right?

And they the private credit fund takes the keys and they're just trying to hope they're hoping to get anything back.

Sure.

And you could see a special situation. John John Zto saying like I think I think you know some of these deals you're going to be lucky if you get 30 40 cents back

and is that is that technically a bankruptcy or just like the the shareholders get wiped like like would you be declaring bankruptcy in that scenario?

Equity's taking a zero almost undoubtedly right and depending on how the restructuring plans pans out it certainly could end up that way.

Okay. But you could see where a very like a bending spoons like entity might come in

and say, you know, hey creditor, we're gonna help you out.

We're gonna we're gonna run this thing. We're going to shift it to the constellation model.

Help me help you.

Yeah. Help me help you. Right. And we're going to shift this to the constellation model. And you know what? We're not going to focus on growth

and we're just going to focus on dividends and we're going to try and get you out. Right. uh that's something that that that a special situations investor might look at, right? And I think that's a much more reliable way to derive IRR, then we're going to turn around this thing that went flat and isn't profitable at all today. And I think AI enables some of these special situations a little bit more. And that's kind of the whole bending spoons thesis on some level, right? So I think there will be a new wave of software special sits people that come in and try to do something with these overlevered software codes with the creditors. Yeah. in some form of agreement,

right?

Okay. So, so I mean you you said that like software PE uh investors might be like heading for the door, but isn't it possible that they spin up a new fund that does special situations like develop new expertise like just reorient their strategy around uh you know curing log jams?

Yeah. Yeah. I mean, well, you're already seeing people leaving Constellation to pursue this, and I think that when LPs evaluate who's the better option,

they're going to go with the guy from from Constellation for special sense than somebody from, you know, Toma or TA or

I was thinking about I was thinking about like internal to

they're like, it was a special situation when I paid 50x AR for this. It was quite special.

Look, you just didn't see my vision for this thing. Okay.

Uh, what's your

Sorry,

go ahead. What's your take on uh on Zuck's move with Manis? You were an early Manis bowl. When when I was uh when I was kind of when I saw that acquisition, I I was thinking, hey,

uh obviously a talented team, have built a product that can get to real revenue. But, uh I think there were some questions of like is Zuck just going to kind of wind down whatever they were doing and refocus

talent acquisition.

Uh was it a talent acquisition or a product acquisition? I was leaning more toward product acquisition. They seem to continue to be investing a lot in it. Uh which is kind of interesting because it's a product category that Meta doesn't

they obviously serve a bunch of small businesses but Manis is being positioned now as like an agent that can help you with your business or a school project. And it just feels like you know obviously hyper hyper competitive. Uh, but what what's your read on on their strategy with Manis and and their odds to actually compete in productivity against OpenAI, Anthropic, you know, Microsoft, all these other players.

Zuck, if you're listening right now, you got a deal, man. That was good. That was a good deal. I love it. I think that Zuck looked and he saw an absolutely magical product that he could have and he bought it, right? It It's magic. I have spent thousands and thousands and thousands of dollars on Manis and it was worth every penny. There are simply things that you can do with Manis that no other inferous provider or product can do.

And I would reveal them, but they're they're by the way.

Manis American company now.

Yeah. And like there's there's like literally things you can do with it. I'm sure you saw the same thing. like they figured out context like LLM context in browser before anyone else in ways that no one else has yet to figure out,

right? And I think that I think that if Anthropic had figured it out, they would have pushed it. I think if OpenAI could figure it out, they would have pushed it and they simply haven't yet. And he saw a piece of magic and he said, "What do we got to pay to get the magic?"

And I think it was right because it's generational. Like I said, there's a lot I've spent a lot of money on Manis. There's things manis can do that no other infra provider can do. Um, and they benefit from open source. So, there's another cheeky thing that Zuck realized.

Broadly an open source bull. I feel like a lot of people are saying like all the money flows to the frontier. Uh, you know, everyone just wants to use the best model, the Opus 46, the GPT 5.4, Codex Desktop can do a lot of these things. Have you have you actually tried the other harnesses and found like a real big delta?

Uh, you know, I I am a uh Manis and Anthropic Maxi, so those are my two favorites. So, like I use Manis for certain tasks and Anthropic for others. But like I'm certain that what Zach realized is that I don't have to care about inference and who's giving it to me because these guys figured out some really special stuff

around how does an LLM process data in and around a web browser.

So he realized, okay, this is kind of inference provider proof.

They figured out this piece of magic, this secret about LLM's using a browser. I'm going to pay whatever price I need to get it. Mhm.

And now if you've heard he's already integrating it with like ads manager.

Yeah, that that makes so much sense.

Manis, I want to grow my business.

All right, give me every dollar in your bank account right now.

What is

No, credit to Zach for kind of uh either knowingly or accidentally realizing that harnesses would be quite important.

Yeah.

Yeah. And and like I said, there's a lot of stuff Manis can do that no other like AI related product can do for me. Yeah.

And it's just it's just really special. So yeah, I think you got to steal you pay whatever price you got to pay within like the re like the history of M&A, right? I think it's a good bet. It's a great bet.

Yeah, especially for their scale and and and the compute that they have. Like there's a lot that they can deliver there that another buyer would not be able to. Uh just

I actually think Manis is like one of the most underrated AI products today.

Okay. I I I just downloaded I'm going to I'm going to try it out. Uh we we we had our intern Tyler download it and give it a try yesterday. We'll get a review from him later on the show.

Uh well, I'll read out one. Somebody in John in the YouTube chat says, "Would be interesting to have Jeremy Gon back on with Carrie, no interest, do a sort of roundt style back and forth on here. I like Car's analysis so much. Feels up Jeremy's alley."

I totally agree. We should do that sometime.

That'd be great.

I've heard of that guy. I've heard of that guy before. Smart, smart cookie.

He's a good dude. You're both former TVPN guests. He's been on the show.

Uh, we'd love to have you back.

Let's Let's throw a smoke grenade and get him out of here.

Yeah, do it.

See you guys.

It's great to see you carried. See you later.

I'll get behind this production.

We'll see you soon. Goodbye and honor.

And let me tell you about MongoDB.