Manufacturing, healthcare and defence are all areas seeing increased interest from alternative asset managers, as private credit investors retrench from their over-concentration in software.

Following the events of the SaaSpocalypse at the beginning of the year, “anything but software (ABS)” is in vogue for private credit managers, as they refocus their interest away from sectors that could easily be disrupted by ever-evolving artificial intelligence (AI).

More recent investment activity by managers has centred around “old economy sectors”, said Greg Betz, head of direct lending at Investec.

Although interest in these “old economy” sectors has “never waned”, it has indeed recently increased, stated Davide Amico, partner and co-head of private credit at Canyon Partners.

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“We see continued interest in a variety of sectors away from software such as healthcare, manufacturing and consumer-related segments,” he said. “This trend is partly due to a retrenchment from the over-concentration in software, but also partly due to the growth trends.”

Amico explained that while, on one hand, the over-exposure to software by many private credit players has led to a “refocus of their front book towards non-software segments”, there is also renewed interest in sectors such as manufacturing due to recent tailwinds.

“In manufacturing, the recent trends of re-shoring, energy security, security of the supply chain, and national security have all led to further investments in new capacity as well as renewed and increasing interest from both equity and debt investors,” he stated.

Indeed, prior to the war in Iran, investment interest in renewables, for instance, had somewhat dipped following political pressure. However, the recent events in the Middle East, combined with the ongoing war in Ukraine, have spotlighted the need for energy security, especially in Europe.

Within private credit, we are seeing a lot of activity in this space, said Amico, particularly greenfield developments in solar and other technologies which we at Canyon are evaluating.

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Another big area of interest for private credit is defence [see page 4], which is “a very fast-growing sector at the moment”, explained Patrick Marshall, head of private credit at Federated Hermes. This is partly due to structural tailwinds such as governments in both the US and Europe boosting spending in this area.

However, the challenge is that with AI evolving so quickly, how do you assess which business models won’t be disrupted? While software, for now, is seen as the sector most at risk, the pace of its development makes it increasingly difficult to predict.

Alternatives manager Arini has stayed clear of software and now only focuses “on industrials and businesses with asset backing”, avoiding asset-light service companies, said Mathew Cestar, president.

“We have been trying to stay away from accounting businesses, software businesses, consulting businesses – those are the areas that are most impacted by AI,” he said.

Read more: Managers hunt for software winners and losers amid AI panic