Andrew Bary

Software provider Medallia is one of the higher-profile problems in the private credit markets and two firms have the most exposure to it.

They are Thoma Bravo, the investment firm that took Medallia private in a 2021 leveraged buyout, and Blackstone, the largest lender to the company.

Software has become a major concern of investors both in public and private markets amid worries about AI disruption.

In the $1 trillion private credit market, investment firms like Blackstone, KKR, Apollo Global Management, Ares Management and Blue Owl make high-rate loans of around 10% to junk-grade companies, mostly to finance leveraged buyouts.

Medallia, which provides customer surveys to corporate clients, hasn't performed well financially since it was taken private by Thoma Bravo for $6.4 billion in 2021. The firm acknowledges there are problems with Medallia unrelated to AI, but it's not easy for outsiders to evaluate.

Why? Medallia, like nearly all the borrowers in the private credit markets, doesn't file public financial reports. The last report was just before it went private in 2021.

That illustrates one of the challenges for investors in private credit. It's almost impossible for outsiders to evaluate the quality of private-credit loan portfolios and judge whether valuations assigned by private-credit lenders are accurate.

From a lending perspective Medallia is mostly Blackstone's problem, although Thoma Bravo faces far bigger potential losses since it has invested much more in the deal and because it's the equity holder and thus junior to Blackstone and other lenders.

Blackstone, one of the leading private-credit lenders, was the main lender for the Medallia buyout, providing about $1.5 billion of the $1.8 billion of debt financing for the deal. FS KKR Capital (ticker FSK), a business development company focused on private credit, owns about $230 million of the Medallia loan.

Thoma Bravo and its partners provided the equity funding, now estimated at about $5 billion.

Blackstone marked down the value of the Medallia loan to about 70 cents on the dollar in February, down from around 77 cents at year-end 2025, according to financial disclosure by Blackstone Private Credit Fund, the leading semiliquid private-credit fund with about $48 billion of net assets.

Blackstone Private Credit Fund, kn own as Bcred, holds about $1.1 billion of Medallia debt, roughly 2% of its net assets, and the smaller Blackstone Secured Lending business development company (ticker BXSL) holds close to $400 million.

Blackstone's Medallia loan, due in 2028, carries a rate of six percentage points above SOFR, a key short-term rate, with the loan recently yielding close to 10%. That results in a sizable interest burden of $150 million or more a year for Medallia on the total loan, Barron's' estimates.

The Medallia situation illustrates the risks in software lending -- one of the prime areas in the $1 trillion private credit market -- due to high prices paid for software companies, limited earnings, and the AI threat to the business.

A key issue is whether Medallia troubles portent greater problems in software lending. The other important issue is whether software lenders like Blackstone have sufficient cushion to weather any big declines in the value of the businesses.

The biggest potential losers from a software fallout will be private-equity firms that have taken private dozens of software companies in deals dating back to 2020.

On the Blackstone Secured Lending earnings conference call in February, co-CEO Brad Marshall addressed the Medallia loan and expressed confidence in Blackstone's risk exposure.

Marshall said that when the loan was underwritten initially, it amounted to just 26% of the total deal value.

"The company has been underperforming, not because of anything related to AI, but due to what we believe to be execution-driven issues, particularly in its go-to market function," he said.

"Early last year, Thoma Bravo installed a new leadership team and they are working through a turnaround plan. We also expect there to be discussions around the capital structure," Marshall said.

One of Marshall's main points was that Blackstone has a lot of financial cushion, since Medallia's value would have to drop by a huge amount relative to the original 2021 buyout price of $6.4 billion for Blackstone's loan to face impairment.

That's the argument made for most software loans in the private credit market -- namely that low loan-to-value ratios protect borrowers. The lenders are betting that the equity sponsors of private-equity deals will not jeopardize their large equity interests in their software companies by not paying off their borrowings.

Historically software lending has been a strong sector for private credit and Blue Owl, which has sizable exposure to it, says its borrowers in the sector have been performing well overall.

Private credit lenders say that some losses are inevitable on their portfolios given that these are junk-quality loans, but that they are likely to be small given what they view as solid underwriting standards.

Orlando Bravo, a founder of Thoma Bravo, which has about $183 billion of assets under management and is a leader in software LBOs, addressed Medallia in a CNBC interview recently, calling it an outlier in what he called a top-performing portfolio of companies controlled by the firm.

"When we bought it, we way overestimated or extrapolated the very high rate of growth of that company into the future. We made a mistake. And that caused us to pay too much. Now, the equity from our standpoint has been impaired for a long time," Bravo said. "Our investors, this group that holds the capital in the world, has known that for years. So there is no new news."

"The other 77 companies that we have, for the most part -- and it's so relevant for AI -- they're absolutely crushing it," Bravo said.

When Medallia was taken private in 2021, it was unprofitable on a GAAP basis like many software companies and had a run rate of subscription revenue of nearly $500 million a year. The buyout price was a stiff 13 times that amount.

When software companies were taken private in recent years, the underwriting basis for the loans often involved was two things. Borrowers looked to subscription revenue, or annual recurring revenue, with the idea that good software companies have sticky customer bases.

And perhaps most importantly, the loans were done at low loan to value ratios of 40% or less, meaning that there were large equity cushions effectively protecting borrowers.

The same rule applies to home mortgage loans. The more equity that a borrower puts up, the less risk to the lender. A $250,000 loan on a $1 million house is much less risky than a $750,000 loan. Private credit lenders liked software borrowers because the loans offered above average rates and big equity cushions.

Banks would generally be loath to make such loans since software companies often have little to no reported earnings and banks tend to like traditional credit protection: profits.

The Medallia situation will mark an important test of software loans to see if there is sufficient cushion to protect lenders.

If Blackstone and other lenders recover all or most of their financing, it would buttress their case that investors have overreacted to software cataclysm concerns.

Write to Andrew Bary at andrew.bary@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 27, 2026 17:24 ET (21:24 GMT)

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