Investing.com -- Apollo Global Management executive John Zito told UBS clients last month that private equity firms are broadly misstating the value of their software holdings, warning that lenders could face substantial losses in the sector.

Zito, who serves as co-president of Apollo's asset management division and head of credit, said he believes private equity marks are incorrect as shares of comparable public tech companies have declined. His comments were first published by the Wall Street Journal.

The remarks come as investors have sold shares of public software companies on concerns that new tools from Anthropic and OpenAI could make existing software firms obsolete. This has raised questions about whether private credit lenders are holding outdated valuations of their software loans, triggering redemptions as investors seek to withdraw funds from private credit vehicles.

Zito's comments at the UBS event focused on private equity valuations, but he noted that many companies acquired by the industry also obtained private credit loans. If the loans face difficulties, the equity positions are also affected, he said.

Zito identified software companies taken private between 2018 and 2022 as particularly exposed. He described many of these firms as lower quality than larger public competitors, referring to a period marked by high valuations and low interest rates.

The Apollo executive warned that private credit lenders and their backing investors could experience significant losses. He said lenders to a generic small-to-medium sized software firm could recover somewhere between 20 and 40 cents on the dollar if the companies are in the wrong place in terms of the new AI-led regime.

Despite the challenges facing lenders heavily focused on software, Zito said the broader asset class will survive the current disruption. He said those who make concentrated investments outside their vehicle's intended scope will probably have a bad ending.

Apollo sought to distance itself from potential software sector losses, telling analysts that software companies represent less than 2% of the firm's assets under management. The company said it has zero exposure to private equity stakes in software firms.