Blog Post
Finding value amidst the software credit storm
Ben Kovacka, Global Head of Private Analysis & Data Content
Software’s recurring revenue, high growth, and capital-lite nature have long made the sector a magnet for private equity capital. That growth has been equally reflected in the leveraged loans and private credit that backed numerous software buyouts — often at high multiples and, at times, underwritten against ARR. While AI has been a talking point for software analysts and management teams for some time, sentiment in the sector turned sharply following the release of Anthropic’s legal solution, with the pace of AI progress spooking the market.
A number of vertical AI solutions were announced in quick succession, triggering selloffs across various verticals and industries — many of which would not traditionally be classified as technology companies, such as insurance brokers or wealth managers.
Debt levels have yet to find a bottom, with negative sentiment also weighing on large deals that were underwritten only months ago. The rerating of valuations has been especially punishing for highly leveraged software structures, where sponsors may now be stuck for far longer than anticipated. That said, tangible negative impacts from AI on the broader space remain limited beyond several sub-sectors hit in the first wave of disruption, such as call centers.
On the contrary, many management teams have been focused on harnessing AI to enhance their products, improve margins, or both. The real fear driving price action is that continued AI innovation displaces the current SaaS status quo over the medium term. Yet contracted revenue, switching costs, deep client knowledge, security team approvals, and the enterprise risk inherent in replacing embedded technology — which may not ultimately cost that much relative to those risks — are all factors that should support vertical software in the near term.
Opportunities are emerging, with investors on the lookout for credits that are the proverbial babies thrown out with the bathwater. Our expert teams are covering the global high-yield, leveraged loan, and private credit markets, unpacking what the AI risk and the selloff actually mean at an individual credit level — and for the broader universe.
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