AI risk and opportunity: The state of tech lending

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Jack Atherton: Welcome to J.P. Morgan's Making Sense. My name is Jack Atherton. I lead J.P. Morgan's EMEA ECM market intelligence team. Today I'm joined by my colleagues, David De Boltz, an MD in our U.S. tech leverage finance team, and Eddie Byun, who leads our global tech ECM practice. Welcome, gentlemen.

David De Boltz: Good to be here, Jack.

Eddie Byun: Thanks so much, Jack. Pleasure to be here.

Jack Atherton: Today we're gonna be talking about tech capital markets, and we're going to be hitting on two key themes. Firstly, capital being raised to build the next generation of AI infrastructure. And secondly, the funding environment for tech names with a deemed AI terminal value risk. David and Eddie sit at the epicenter of issuers and investors, so are uniquely positioned to be able to provide a perspective on both sides. And this podcast recording comes on the back of our Hypergrowth Private Tech Conference that we hosted in San Francisco last week. I also need to say upfront that for legal and compliance reasons, the conversation will be limited to high-level themes without talking about specific issuers. And I'll also note, note that we're recording this on Friday, January 30th. Let's get into it. David, I'm gonna come to you first. Can we start high level with what you're seeing across the lending market right now?

David De Boltz: It's pretty incredible what we've seen over the last, call it week, two weeks, uh, in terms of the uptick in volatility going on, especially in the tech leverage finance space. Normally, it's been a, a market that is pretty sleepy in the sense of pushing leverage, very tight spreads, um, very aggressive lending patterns. Uh, and the last week or so, we've really seen a sharp deterioration in terms of how the market is viewing some of these credits, which is a real dichotomy versus the rest of the sectors. The market overall, leverage finance markets are in a great spot. We've got a huge amount of cash in the system, we've got great technicals, and the M&A pipeline simply isn't enough to satiate these investors. So what does that mean? That just means too much cash in the system. So we came in this year with a big repricing wave, everyone's feeling good, everyone feeling like they had to stay invested. And then over the last two weeks, we've seen a, a sharp deterioration in terms of secondary levels. A couple of key indexes just to show you that. Um, the average dollar price for technology loans is now at 93.3 versus the market of 96.4. And that is about 100 basis points of underperformance versus the market. So you can really see that investors are kind of starting to pivot to, call it, more recession proof, more sectors that simply haven't got this AI risk. The Wall Street Journal's picking up on this, other news agencies are picking up on this, and we saw a big software article, uh, over the weekend, effectively talking through the software spreads and, and how much additional cost you need to be lending to a software credit right now. So once that picks up into the broader market, the real fear then is our outflow is gonna start into ETFs, our outflow's gonna start into some of the other funds as the LPs, as investors start to fear that, "Okay, let's take a pause here." I would, I'll bring you right up to, to kind of the last few days. We have seen a bit of a, bit of a change in tone between some investors picking up and s- thinking through who the winners are gonna be. So we've seen some investors start to buy some of these loans that have been moving two to three, four points. Um, and on top of that, we've seen a lot of capital move into what we call the new AI infrastructure, AI kind of bulletproof, uh, credits. We've seen a bunch of deals in the space. And despite all the volatility over the last week, we've seen an incredible, uh, incredible amount of stability in those names. So, the way we're thinking about this market is all of that capital, all of that in, technical that we're seeing, it's all chasing the same type of investment opportunities. And they are AI infrastructure, neocloud-type offerings. And that's where that, that capital is going right now.

Jack Atherton: Fantastic. There's lots there for us to dig into and follow up on. Uh, I, I'd also add that the, the genesis for putting this episode together was really around what we saw in some of the lending and credit markets late last year, 2025, and some of the credit market jitters around funding some of the, uh, software companies and, and neocloud platforms. So, uh, you hit on a, a, a ton of those debates there. Um, Eddie, coming over to you, can you talk a little bit about what you're seeing in the software space from an ECM perspective? The pipeline of PE assets there is clearly huge. What sorts of names and subsectors within tech are you seeing real investor demand for?

Eddie Byun: Sure. Thanks, Jack. For the software space on the equity side, it's really been very dynamic, uh, day-to-day, and also very complex for the public markets. And if you take a step back, and fundamentally, uh, what is driving,you know, these recent sector shifts, it's really with a lot of the latest AI products that have come to market. Um, the market has begun to question what the long-term impact of such products will be on the existing cohort of software companies, i.e., whether it's reducing the investment costs needed to build new products, and also kind of deteriorating the moats for existing software companies that many have built over years and years. And so there really is a questioning of what is the long-term durability. And as investors will say, they will ask, "What is the terminal value of any given software company?" And I think that is a really difficult answer for many to predict right now. In a lot of our conversations with investors, they will tell you, particularly those that have been focused around software for a long period of time, that this is one of the most difficult periods that they've been in, uh, and operated in. While many recognize that the current sentiment may be overly bearish, and that given current valuations, um, that there could be good positioning around the upside, I think given some of these headwinds, many are willing to kind of sit out the first kind of 10, 15 points of a potential recovery. And it's very much in a show-me mode. And so with that being said, you know, how that translates to, you know, many of the assets that are already public, and more importantly for those that are considering going public, including those owned by many sponsors, what we've seen is a pretty clear bifurcation in terms of the way the market will evaluate many of these software stories. And so in particular, I think companies that are able to demonstrate, you know, integration and are more generally vertically oriented around the industries that they operate in are seeing better reception from investors, because investors are taking a view that these are less likely to be disrupted by AI, that, given how close they are to their consumer or their relevant industry, that they have accumulated a lot of data that will be very difficult to replicate in the short term. And so I think that is really key for many of the companies that are considering going out to market. I think the AI disruption will be a question that investors will ask right out of the gates in any meeting for any kind of software company. And those that are more horizontally oriented or, or more broad in terms of their scope, I think will face tougher questions from the market. And so I think that type of bifurcation and distinction from the market is going to be a really important factor for those considering going public and how, you know, the buy side will view some of the assets coming to market in the near term.

David De Boltz: Yeah, and, and just to add to that, Ed, I think the, the herd mentality and the fear of what is not known is driving both the debt and equity markets. It's, "Does someone know more than me?" Are they seeing some moves in, in, or, or the stock price or, or on secondary levels in debt and thinking to themselves, "What am I missing?" And it's the fear of just, "Okay, I'm happy to sit there and wait for the recovery to happen before stepping in. I don't want to be the first right now." And that, that herd mentality is definitely driving, especially in the debt markets, and you can see obviously the sharp moves across, across both products here to kind of driving that.

Jack Atherton: Yeah, super interesting. And it's.. I don't think I speak to any rational investor that in reality thinks that software terminal value is a zero. It's just there are too many bear cases to fight against that are all too hard to disprove. And it's really unclear what the catalyst is to really drive a wedge and a, a bottoming and a stabilization of the sector right now. So I get it. And at the same time, you've got the other half of tech, the semis, networking, infrastructure space that is just seeing constant upgrades. And no one wants to jump off that boat too soon and end up trying to catch software too early and miss out on a, what could be another six, 12, 36 months of upgrades across semis and AI infrastructure. Um, and maybe kind of keeping on that, that theme of AI infrastructure and neoclouds, uh, David, can you talk about some of the types of deals that you've seen so far there?

David De Boltz: Yeah. And, and 2026 is 100% gonna be, this is gonna be one of the driving themes of primary issuance into this sub-sector. Late last year, we, we saw a few of the, call it ex-neocloud offerings moving into the high-yield space. There's been four to five of those deals now come to the market. And the proof of concept is there.  The high-yield market absolutely wants to finance the AI infrastructure rollout. Also, the leverage loan market wants to see these deals too. So there's two very large markets that's willing to put dollars to work to help effectively with anyone that's not these hyperscalers, investment-grade rated, that need to come down into the high yield market and, and effectively raise capital in short order. The other side of it, over the la- qua- the last few years, traditionally these credits have raised money in, in the, in the ABS market or the securitization market. That market is very much open, very constructive, but there's a time associated with accessing the capital. And some of these companies simply want the capital upfront, and they're willing to potentially pay a little bit more to get that capital. And ultimately, where we're seeing so much cash in the system, as I mentioned at the beginning, they all want to lend to AI-proof, AI tailwinds, AI infrastructure deals, and ultimately the cost effects isn't too high. So the cost of getting the access to this capital is, is, is worthwhile. And we're seeing a pipeline build here in terms of more of these neocloud companies potentially coming to access both the high yield and the loan market over the next few quarters.

Jack Atherton: And can you talk a little bit about some of the factors that the market and investors care most about as they're trying to evaluate different credits?

David De Boltz: This is still evolving, Jack. There's a few factors that every investor focuses on. The first one really is the tenant, who is giving the lease to the neocloud? Obviously, you want an investment-grade counterparty there. So an investment-grade counterparty is ultimately seeing spreads or cost of your debt going to, call it six, 7%. And that really is driving the compression there. Versus a unrated or a high-yield tenant, that does have a cost implication, potentially up to 200 basis points right now. But there's ways that the market is evolving and starting to understand effectively different pieces here. So you have a construction risk. That is not just if it gets done, but that is time. That is, do they have their costs locked in? There is completion guarantees, are they being provided? They're being kind of bifurcated between general-purpose cloud readiness. So if there is a bubble that potentially ends, can these data centers be kind of moved into a slightly different use case, alternative use case? Um, and then you've got location. People are still learning about location and the desirability of location. In the United States, you might be able to tell that I'm learning my geography of the United States-

Jack Atherton:  (laughs)

David De Boltz: ... uh, to, to understand the desirability in each state right now. But as the market evolves, as we see more issuers come to the market, you are going to see the market really start to understand all of these different pieces of the credit, and you're gonna see a difference in cost between them. The other side of it is the market understands that when these companies effectively get through the construction phase, you're likely to see a different risk profile. And for example, if you have that investment-grade tenant with no construction risk, should it trade like an investment-grade bond from a yield perspective? Potentially it gets pretty close. So the market's obviously buying into the convexity, the upside into these deals. And that's what makes potentially some of these issuers very attractive, uh, to, to kind of lend into.

Jack Atherton: Maybe talking about, moving away from the hardware space onto the AI-native names, and as they start to come to the debt markets, I'm thinking about the LLMs, the code assist platforms, the workflow tools that have really emerged over the past few years, can you talk a little bit about how they are coming to the debt market?

David De Boltz: This is a little bit more in the early days. So we are starting to see a couple of them access the market. It's more expensive, it's unrated, it's traditionally with private credit, more hedge-fund-type holders. But some of the numbers you're seeing in the press in terms of how much capital needs to be raised, all of the different pockets, high yield, leverage loans, private credit, banks are all looking at how can they lend in pre-sizeable numbers to get access to the winners in the space. So we have seen a couple access the market. It's more on a parent or getting comfortable with the potential other parts of their business right now, but ultimately, we are going to see more of them access the market. The market understands and is willing to give a longer term view in terms of enterprise value versus cash flows right now and traditionally credit five, 10 years ago, wouldn’t really even lend to negative free cash flow companies? The market has evolved. The market is now willing to lend on an LTV, enterprise-type value, and we're seeing that across a number of these credits. So we do believe over the, call it next 12, 18 months, whether that's ahead of an IPO, whether that's after an IPO, the debt markets want to be part of these stories, they understand the value, and they're willing to take a jump in terms of when cash flows are gonna be coming to the bottom line given, given the enterprise value here.

Jack Atherton: Fantastic. And maybe coming back to equity markets, Eddie, can you give us a bit of perspective of the health of the tech IPO market right now? What do you think the investor demand looks like?

Eddie Byun: Definitely. Um, and, and I must say, I think this is a really exciting and interesting juncture for the IPO markets more broadly. If you look last year in 2025, it was clearly a step forward for the tech IPO markets after many years of kind of subdued activity, I would say. And if you look at overall IPO volumes in the space last year, IPO volumes were up three times over what they were the year before. And so we're clearly seeing an acceleration in that activity. I would also say kind of in terms of investor engagement and demand across those deals, very, very healthy. And we're seeing a lot of focus, uh, from the buy side in terms of the IPO product. And, uh, we are seeing very healthy order books in those deals last year. Um, now I think the aftermarket performance has been a little bit more mixed. Uh, particularly late in the year, we saw more volatility that impacted performance, but I think when you are going through a growth inflection period for much of the space as we have seen in recent months, I think that could be certainly expected. And so I think as we head into 2026, we feel quite good around the overall health, uh, of the IPO market and are anticipating a wave of activity to come. The one thing that I would characterize and, and highlight is in recent markets, we're also seeing a diversification in terms of the types of companies, uh, that are coming to market. And again, if you look at last year's cohort as an example, you saw issuers from FinTech, to digital assets, to internet, to many AI-related names, and as well as some software names as well. So you're seeing a great diversity, um, which bodes well for the health of the IPO market. And we're seeing that trend continue, uh, into 2026 as we look at the landscape of potential activity to come. Obviously, there is a lot of focus around some of the larger names and, and mega-cap names that have been speculated or expected to come, and, and, and oftentimes, you know, presents the possibility of kind of, very large deal sizes and unprecedented large sizes that will be coming to market. And there are a couple of considerations around that to bear in mind as we evaluate some of those considerations. You know, number one is simply just market capacity. And I think one interesting stat to bear in mind is if you look at the U.S. equity markets overall, since 2010, you know, the U.S. markets have, in terms of total market cap, has expanded by almost four times, right? And also during that period, the tech sector's share of that market cap has almost doubled, you know, from 12% back then to almost 25% today. And so what that tells you is in terms of the portfolio allocation and the size of tech within the buy side and total addressable AUN as we might look at it, it's been a manyfold increase in terms of the importance of the sector more broadly. And I think that bodes very well in terms of the public market's ability to absorb some of these companies. I think secondly is if you look at many of the potential IPO candidates, I think with the advent of AI and, and other technology developments, many investors will view these as kind of generational assets that are scaled, that have long-term potential, and also, frankly, uh, remarkable rates of growth that has very rarely been seen in the history of tech capital markets. And therefore, even from a fundamental perspective will attract a lot of investors that want to be invested in these companies at IPO and be part of their growth, which will compound over, over the years to come. And I think the last point that I, that I touch on as we think about some of these dynamics is really the retail component. And you're seeing the U.S. retail investor base continue to grow, continue to be a large factor, not just in public market trading, but in many instances in the IPO itself. And when you have many of these very large companies with strong consumer visibility, as well as broad profile across the public, I think these are names that many retail investors will, will gravitate to. And even on our platform within J.P. Morgan, we're seeing really strong retail demand across many of our deals. And so I think that's another factor to consider. And by the way, I think the retail activity is going to be a dynamic that is across the U.S. public equity markets more broadly, and not just around the, the cohort of, of companies and IPOs that we're seeing today.

Jack Atherton: Being set in Europe, I'd love to be able to tap into some of that, or replicate some of that U.S. retail demand that feels slightly non-existent over here, but, uh, a bit more work to be done there. Guys, I think I'll wrap it up there. I've thoroughly enjoyed this conversation. It's clearly a fast-moving market both to the upside and to the downside in places, but it's been clear from this conversation that there is a lot of capital out there looking to be deployed across tech and, and the AI thematic.

Eddie Byun: Jack, thanks so much. It's been great.

David De Boltz: Thanks, Jack.

Jack Atherton: Yeah, thank you both for joining us.

Jack Atherton: And thanks to our listeners for tuning into the Making Sense Channel. This is also a great opportunity to plug our Global Leveraged Finance Conference coming up March 2nd to the 4th in Miami. The conference is a great opportunity for issuers, borrowers, investors, and lenders to connect and dive into the latest in debt capital markets. Our team will be there. So if you're attending, come say hello and join the conversation.

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