Key Extracts From Blue Owl Technology Finance’s IVQ 2025 Conference Call

INTRODUCTION

For some reason, we were not able to get our hands on Blue Owl Technology Finance’s (OTF) IVQ 2025 conference call - which occurred February 19, 2026 - till a few hours ago. That’s been unfortunate, as the giant BDC is right in the eye of the storm, amid debate over the potential impact of Artificial Intelligence on the creditworthiness of incumbent borrowers in the “Software” sector, broadly defined. Not only does OTF have a $14bn portfolio spread across 199 companies, but 70% of it is in “Software”. That has proven disastrous for the BDC’s stock price in recent weeks, as the fears about a cascade of AI-related defaults have intensified. Anyway, we’ve now had the opportunity to read the transcript and digest the most recent 10-K. Regarding the latter, we thought it would be instructive to highlight the most important points made about the BDC’s Software exposure made in management’s prepared remarks and in the ensuing Q&A. We’re leaving out all the traditional information about earnings, balance sheet, and dividends to address the subject most on the minds of investors, analysts, and anyone conversant with BDCs and Private Credit. Where appropriate, we’ve added our own comments. At the very end, the BDC Reporter offers its own views.

“Our software borrowers are delivering low- to mid-teens revenue and EBITDA growth on average, among the strongest in our direct lending strategy”. 

We’ve been surprised during this earnings season by several BDC reports that their portfolio companies continue to grow substantially above GDP levels. It is doubly reassuring to hear from OTF that software companies are at the vanguard. This strongly suggests that any damage from new competitors or the LLM behemoths themselves is entirely prospective. Or might never happen.

“Our technology strategy is supported by a dedicated team of over 40 technology investment professionals, part of our broader direct lending team of more than 120 investment professionals. The team is organized across 10 key subsectors, including cybersecurity, health care IT, and fintech, giving us deep domain coverage and experience navigating ongoing technology shifts. They have evaluated AI risks and opportunities for many years”.

Other BDCs involved in software/technology have made the same point. Lending in this area is not left to generalists but is undertaken by specialists familiar with the technology and the landscape, and very much aware of the risks involved. The markets - and the financial press, which is both amplifying and serving as an echo chamber for the AI issue - may have only recently awakened to this subject, but the better lending groups have been contending with it for several years now.

“Given how quickly the technology is evolving, we proactively revisited our core thesis and reevaluated our portfolio with a forward-looking lens. Our analysis confirms the quality of our assets and gives us confidence that our portfolio remains aligned with where the market is going”. 

Even OTF has been spooked by the recent crisis of confidence. We’d like to have been told more about what the “reevaluation” of the portfolio consisted of. Nor would we have expected the BDC to announce anything but a positive outcome, but this quote does suggest OTF is taking the matter seriously.

“As a reminder, we primarily lend to large-scale market-leading companies that provide mission-critical solutions with durable moats. We emphasize systems of record that are deeply embedded in customers' workflows, carry high switching costs, and operate in environments where errors, downtime, or security breaches cannot be tolerated”. 

The many voices predicting a credit catastrophe have never, in anything we’ve read, addressed exactly how AI will grab business from these well-entrenched and well-funded incumbents. 

…” software comprises approximately 70% of our portfolio. The balance of the portfolio is made up of tech-enabled services, other technology sectors, life sciences, and a small portion of nontechnology investments. We remain enthusiastic proponents of software. Software is an enabling technology that can serve every sector, end market, and company in the world. It's not a monolith, and neither is AI. Great software businesses provide mission-critical solutions that enhance productivity, drive efficiency, and replace analog and error-prone ways of conducting business.The software industry has navigated significant shifts before. When the industry moved from on-premise license and maintenance models to cloud subscription-based pricing models, there were winners and losers, but the shift ultimately expanded markets and strengthened the category. Like the cloud transition, we expect Gen AI to drive significant long-term value through increased product utility, operating leverage, and expanding enterprise software wallet share. Our underwriting thesis remains focused on sticky, mission-critical applications where AI serves as an additive layer rather than a replacement. We believe the most resilient winners will be incumbents who successfully integrate these capabilities to solve complex enterprise-grade challenges, thereby increasing switching costs and solidifying their status as essential corporate infrastructure”.

Much of the discussion about the impact of AI has been framed as an either-or choice. In fact, as OTF makes clear, both the incumbents and their supposed challengers have access to the new technology. The former, though, have the advantage of already being locked into their business relationships, while the latter are on the outside, looking in.

“Given the heightened focus on software, it can be easy to think about it as a single homogenous sector. That isn't how we underwrite or manage our portfolio. Instead, we think about our software exposure across 3 core categories: applications, systems, infrastructure, fintech, and payments, which together represent roughly 70% of the portfolio. I'll briefly walk through each one of these. First is application software, which represents about 50% of the portfolio and is the operating layer for core business functions, including ERPs, CRMs, supply chains, and vertical-specific SaaS. We believe incumbents in these categories can be insulated because they control the proprietary data and complex workflows that AI needs to be useful in an enterprise context. As true systems of record, these platforms are extremely difficult to replace, and we believe they will evolve into systems of action where AI increases product utility, deepens customer reliance, and broadens opportunity to expand within their existing customer base.Second is systems and infrastructure software, about 20% of the portfolio, where cybersecurity is the largest component. This is the defense layer that protects enterprise data and networks to keep systems connected and operating reliably. We see this as structurally resilient and a beneficiary of the AI transition as businesses expand technology, services, and complexity across the organization.Finally, fintech and payments are approximately 5% of the portfolio. These businesses provide the critical rails for the global movement of capital, a category we view as insulated from AI disruption. While AI can improve things like fraud detection and the customer interface, the core need for secure, regulated, and reliable movement of funds remains unchanged and creates significant moats for incumbents. The categories we prioritize each play a specific functional role that is difficult to bypass. Even as the technology landscape shifts, the need for auditability, control, and data integrity remains constant. As such, we believe these companies are well-positioned to remain as the foundational layer to which new AI-driven activity is governed and executed. While there will certainly be winners and losers as AI reshapes the landscape, we believe the market leaders we finance are using AI to stay on the winning side of that transition”.

All of this is debatable, and we don’t have sufficient domain expertise to offer a conclusive opinion. Still, everything OTF claims above has been said elsewhere by other industry experts. 

“The challenge with AI and current large language models is that while it is world-class at communicating, their underlying nature is probabilistic. It is a statistical engine designed to predict the next logical pattern. This is excellent for a personal assistant, but it is a problem for systems that need to be precisely accurate. A payroll calculation or bank transfer is either 100% correct or a failure. And the corporate world is almost right is completely wrong. This is why we believe established software leaders, the incumbents, occupy a much stronger position than the market currently discounts. These companies own the systems of record and the workflow. They have spent decades codifying the intricate rules of how a hospital operates or how a global supply chain moves. They don't just have the data, they have the operational context. We engage regularly with our nearly 200 portfolio companies and their sponsors. And what we're seeing is that AI isn't theoretical, it's already operational. Many of these businesses are backed by sophisticated private equity sponsors that are investing meaningful resources to embed AI into products and workflows in ways that strengthen their leadership positions. In our portfolio, the incumbents are using AI inside proven zero-error frameworks, using AI to help with reasoning while relying on their proven deterministic software to execute. Importantly, that framing matters for us as lenders. A lot of the public debate right now is being expressed through equity market volatility, who wins the growth, who captures the upside, and how valuations reset. Our returns don't rely on hyper growth. We underwrite for durability and downside protection first.The portfolio is predominantly senior secured, and we're typically sitting at low 30s LTVs, meaning that over 65% of the company's value would need to be impaired before our investment is impacted. There is inherently a margin of safety in our capital structure. And we're not taking loan bets. Our loans generally have an average duration of 3 to 5 years, which gives us a defined time horizon for how this evolution plays out. In addition, the portfolio turns over actively with about 1/4 of the book repaying each year, which means a large portion of today's portfolio has been underwritten in an AI world. Many of these businesses are built on multiyear contractual recurring revenue models, which support stability through periods of change, and we have contractual maturities; ultimately, we must be repaid.” 

One does not have to be an expert in AI or software to question whether the former can challenge the latter as readily as so many pundits have suggested. The LLM technology itself is still in transition, and supposing that Perplexity, OpenAI or Claude have the time, resources, or even the ambition to “go after” the business held by thousands of incumbents does not make common sense. Also, we can’t help but wonder whether end-users are asking themselves whether a switch, if even possible, would be advisable given the likely shake-out to come among the LLM companies themselves.

Question And Answer

Arren Cyganovich Truist Securities, Inc., Research Division

I appreciate all the comments. Clearly, you're still very confident in software. With the $900 million backlog that you've mentioned, is there a big component of software in there? And when you're talking to sponsors as you're kind of moving through this in real time, what are you hearing from the sponsors in terms of their continued commitment to investing in the space?

Erik Bissonnette, President

Yes. I think it's pretty consistent with what we've looked at historically. There's some -- it's probably a pretty comparable mix in terms of overall software mix between applications and some security opportunities. In our conversations with our portfolio companies and sponsors, they're doing the same thing that we're doing. Everyone is reevaluating everything they own and looking at how they are going to consider moving forward and invest through the lens of exactly what we're seeing today. So everyone is really re-underwriting and refocusing on what we think are the most important things, right? So enterprise-grade complexity, as I said, data gravity, workflow modes, proprietary assets, network effects, understanding tech debt and pricing durability, fault tolerance, regulatory infrastructure, all of these other factors, as we think about what are the most attractive areas to invest in the new world of AI.And we continue to see new opportunities, businesses that are compounding their leads and compounding their moats, leveraging these tools that are democratic and everyone has access to, and we feel that the incumbency position in which they're in will continue to help them continue to grow. And we're very confident. Over time, we will -- there are areas, as I said earlier, particularly some areas that were in scope of in applications, maybe parts of managing the development life cycle and pipeline for software developers, or passive repositories of information with lightweight user interfaces, there are narrow point solutions that are not particularly embedded, and those are at risk. And frankly, we haven't really been focused on those before. So the application aperture might tighten just a little bit, and you might see a little less in applications, but I still think there's going to be some tremendous opportunities there”. 

Here is a real-time snapshot of how OTF is underwriting new transactions in the post-AI hysteria period. We appreciate the BDC pointing out segments that might be affected.

Casey Alexander, Compass Point Research & Trading, LLC, Research Division

"The private equity sector is pretty reactive to what it sees as market sentiment. And seeing this -- I mean, you guys are pretty underlevered. Is your pipeline shifting, and are private equity firms shifting their activity away from software at least until there's more certainty? And does that create more challenges for you to get to a more fully levered position?"

Erik Bissonnette, President

I think that answer might depend on who you're talking about in the private equity universe. I think if you were to talk to some of the larger players, the technology-focused investors, they largely share the thesis that we have, and they are out talking and evangelizing about what we see and what they see and where the opportunity sets might lie. And frankly, particularly in the public markets, there might be some really attractive opportunities that have been created by somewhat of a dislocation. This is kind of similar to what we saw in 2022, where coming off the peak multiples in ' 20 and '21 in the ZIRP environment, there was a meaningfully large amount of, I think, over 20 go-private tech transactions at pretty good valuations and really attractive rates of return from our perspective. That isn't to say that for us or for others that we are exclusively software. As I said in the prepared remarks, we really like software, and we will continue to focus on areas of software that we think are the most defensible over time, but there are other areas of tech that we have been invested in. There are other areas of business services. There are other areas of life sciences that we continue to focus on. So I think the aperture that we have is appropriately wide and it doesn't particularly give me concerned about the overall opportunity set to get to our target.

Craig Packer, CEO & Director

I might just add, I actually don't think the private equity firms are reactive. I think they take a long view. And I think they're extremely well-versed in the space. And they're not making investment decisions based on the headlines of today. They're deep into these companies. And I think that they -- I would expect that they will be able to discern businesses that are going to do well, and they're going to view this as an opportunity to buy them cheaply. We've seen this for 30 years. This is the history of private equity.I would also say that without in any way minimizing the disruption of AI, we think it helps us as a direct lender to see the public loan markets get dislocated, and it helps us. That's a competing source of capital -- so those investors don't have the ability to do deep dive due diligence. They don't have 40-person investment teams that get to know their companies and get detailed financial information. They're just trading on headlines. And so that's an opportunity for us. So I'm completely confident that we're going to be able to get OTF to its target leverage. We're not hell-bent on all that being in software. But if there are great software investments, we'll do them. But the fund has a broad mandate, as Erik said. And in this environment, I expect others to pull back their lending capacity, and I think we're going to benefit from that for the select deals that we do”.

The current environment has affected OTF’s stock price, but Mr. Packer makes clear that the BDC might be able to make lemonade from these lemons. A large swathe of businesses thought by some to be AI-fragile might have to pay considerably more for their debt capital going forward. We could see a repeat of the situation in 2022-2023, when the syndicated markets pulled back, leaving Private Credit to demand much better terms and pricing from would-be borrowers. That would be a drastic change from the dog-eat-dog pricing OTF - and much of the rest of the Private Credit industry - has had to contend with in the past few years. The proof of the pudding could show up as early as the current quarter in new deals booked.

Paul Johnson, Keefe, Bruyette, & Woods, Inc., Research Division

I'm just curious in the decade or so, or near decade that you guys have been investing in the space, the software space, and direct lending broadly. But how many software defaults have the Blue Owl platform worked through in the total aggregate of investments that you've made in that space?

Erik Bissonnette, President

Yes. I mean, the answer to that is one. And that one company was a publicly visible name that we worked through, and we eventually took over that company. We still own that company. It's still on the SOI, and we're still trying to see where we can take that business. But that's across -- I don't have the precise number of the total investments in software since inception, but it's 300-plus names, obviously. So a tremendous number. The number of defaults is almost nonexistent, and really troubled situations are very small. And I think that's a function of 2 things. Number one, it's a function of the strength of the overall business model, but also our asset selection. I mean, after 10 years, at some point, it's a pretty real and observable track record over a long enough period of time”.

We are almost sure that the only software default refers to Pluralsight, which was acquired by its BDC lenders in 2024. Unfortunately, in recent months, OTF and other lenders have placed the restructured second-lien debt on nonaccrual status. The BDC Credit Reporter is not optimistic about Pluralsight's outcome. With that said, only one bump in the road amongst 300 is a remarkable credit record.

Paul Johnson, Keefe, Bruyette, & Woods, Inc., Research Division

Very helpful. And then on -- I'm just curious about your observations of the ARR structures within the portfolio. I honestly can't remember if you've disclosed how much of the portfolio is ARR, but any sort of observations and trends there in terms of conversions or payoffs this quarter, and your thoughts on the performance there?

Erik Bissonnette, President

Yes. The ARR percentage has been coming down pretty dramatically over the past few years. It's probably sitting today somewhere in the low teens. And that drop-off has been a function of most of the class of 2022 and some of 2023 converting early or being refinanced into alternative markets. So they've met their growth goals. They've generated a meaningful amount of EBITDA, and we've either converted them into regular rate cash flow transactions or they've been executed in alternative environments. So we think that there's still really good businesses that could be underwritten on that basis.I think, obviously, the bar for that type of underwriting has always been exceptionally high, and I think it will continue to be exceptionally high, particularly in a world where we're evaluating potential evolutions of revenue models. So it's a pretty low percentage. It's the absolute lowest percentage it's been, frankly, since inception right now, and we'll continue to monitor that going forward.”

ARR loans were made at high multiples and often included PIK provisions because the companies were high-growth. We expect that the ARR subset of software companies will be subject to special scrutiny for some time to come. We’ll be looking at both OTF and several other larger BDCs to see whether the number and proportion of these assets decline over time. 

OUR VIEW

We found management’s presentation very forthcoming about the controversy du jour, and their defense of the current and future outlook for OTF’s software lending was credible and heartening. The most telling aspects of what we learned are that there is absolutely no evidence of any current “cracks” in the financial performance of its existing Software and Technology companies.  (Our own review of the BDC’s huge portfolio of 199 companies identified only 3 troublesome names - the aforementioned Pluralsight, Peraton Corp (whose challenges have to do with non-technological factors), and e-commerce furniture “manufacturer” Walker-Edison, a long-standing sore spot for OTF and many other BDCs, and close to being written off). 

At this stage, investors have to decide for themselves whether OTF and the host of BDCs that have defended the credit outlook of their Software portfolios are deluded or not. If they are, and the many pundits who have been projecting an apocalypse are correct, OTF will surely be in Big Trouble. However, even if the nay-sayers are correct, the evidence on the ground suggests defaults, bankruptcies, and ultimate liquidations are some time away.
However, if OTF’s arguments prove to be anywhere close to accurate, there should be no cause for alarm, and this recent episode will need to be regarded as a sort of mass psychosis.

The BDC’s credit performance at the moment - setting aside concerns about the future - is amongst the very best in the upper-middle-market BDCs. We’ve seen the IVQ 2025 metrics for about 20 public BDCs, and OTF has some of the best numbers. For example, the BDC has only $80mn of investments rated 4 or 5 on its internal performance scale; only 0.4% of assets are on non-accrual status, and 0.3% are at fair market value. Only two companies are on non-accrual. We’re hard-pressed to point to any BDC in any segment of the market that can be said to be performing better at this point.