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The tech sector has seen significant growth—and significant volatility. But if you seek out a certain subset of the sector, says Erik Bissonnette, Senior Managing Director and Co-Head of Technology Investing at Blue Owl, you can find companies that provide steady, durable performance.
Spending on software is expected to increase 14% in 2025, reaching $1.23 trillion.
Software companies that provide mission-critical solutions are attractive investment opportunities due to the "stickiness" of their products.
Cloud computing and, more recently, AI only increase the growth expected in software spending in the years ahead.
“Tech” is a term that gets used fairly indiscriminately, including everything from car manufacturers to online retailers. Can you help define what “tech” means to you?
Erik Bissonnette: When you distill it down, the technology space can generally be broken into four major industry groups – software, IT services, technology hardware and equipment, and semiconductors and semiconductor equipment. These groups can be further divided into industries and sub-industries but collectively the space represents over $5 trillion in global spending. We focus most of our time on B2B software, which is more than $1 trillion of the $5 trillion total.
What kind of B2B software companies are you focused on?
A: Our investment thesis centers on lending to companies that sell mission-critical applications to their users, making them essential to an organization’s core functions and operations. Because of this business dependency, these companies tend to have very attractive financial profiles – recurring subscription revenue, high retention rates, strong gross and operating margins, and minimal capital intensity. Each of these attributes contributes to software offering what we view to be superior business quality and risk adjusted returns relative to other industries.
Tech-related stocks have generated the lion’s share of growth in the public markets. Those markets are now experiencing historic volatility. How are privately held software companies performing in this context?
A: It's hard to generalize about an entire market so I wouldn’t want to speak in absolute terms. That said, if we use our portfolio of nearly 200 unique investments across the technology universe as a proxy, then absolute rates of growth have slowed since their peaks in 2020/21. However, overall performance has remained healthy, with our borrowers maintaining low double-digit organic growth for the past two plus years. We are pleased with this performance—while we certainly want our portfolio companies to continue to grow, it is important to remember that as lenders, we don’t need the companies to grow 20+% to support a valuation of X, or whatever you paid as an equity investor for an asset. Reasonable growth balanced with strong retention and substantial margins are a perfect combination for us.
What makes software so stable?
A: One of the most important traits a software company can have is the degree to which it is providing mission critical solutions for their customers—enhancing productivity, driving efficiency, optimizing supply chains, and replacing manual and error-prone ways of conducting business. While overall technology spending may decrease for the customer in difficult economic environments, software that facilitates day-to-day operations is the last thing that a company will turn off, providing an inherent level of stability for our investments. We expect this phenomenon will only continue as tech becomes further engrained into our daily lives and more deeply entrenched in workflows. Core business software is almost akin to a utility, like electricity, that we rely upon every day.
What do you look for when lending to a software company?
A: As I said before, one key piece is having mission critical solutions or, in other words, software solutions that are critical to business operations. Highly embedded software with high switching costs makes these products incredibly sticky. Beyond that, we look for market leaders or dominant or growing players with established customer bases. So now that we have critical software and growing companies, we check for visibility into recurring revenue streams, strong unit economics to provide operating leverage, and how capital efficient these businesses are. It's a blend of all these things taken together.
Gartner forecasts that spending on software is expected to increase 14% in 2025, reaching $1.23 trillion. This is on top of nearly 12% growth in 2024. What’s driving this growth?
A: Technology has evolved so vastly over the last 20-30 years that while it is difficult to believe it’s still in its infancy, this is very much the case. There is an immense amount of white space in almost all areas of tech as organizations across industries continue their digital transformations.
Some of the larger areas of spending in the coming years are expected to be software modernizations, with companies refining legacy systems with next-gen platforms and enhanced functionality. Additionally, we continue to see investment in cybersecurity, as security threats have become omnipresent, and, of course, AI deployments will continue to expand dramatically.
How do you think about growth of the software market in the next couple of years?
A: I am incredibly excited for the next couple of years—we are just scratching the surface in many areas, from cloud computing to artificial intelligence. While the world’s digital transformation has only continued to accelerate, there are still very few dedicated pools of capital focused on lending to software companies at scale, of which Blue Owl is one, which will create an abundance of opportunities for those platforms in the coming years.
Interviewee
Erik Bissonnette
Erik Bissonnette is a Senior Managing Director of Blue Owl, Co-Head of Technology Investing for Blue Owl, and a member of the Adviser’s Technology Lending Investment Committee. Mr. Bissonnette is also President of certain funds in Blue Owl's Technology Lending strategy, including Blue Owl Technology Finance Corp. I, Blue Owl Technology Finance Corp. II, and Blue Owl Technology Income Corp. In his role he is responsible for the day-to-day management and strategic oversight of the credit selection and portfolio management process across the funds he covers.
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