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U.K. direct lenders abandon the recurring-revenue software playbook

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U.K. mid-market direct lenders are tearing up the old playbook. Recurring-revenue software no longer gets an automatic pass, and cyclical sectors like retail and construction no longer get an automatic no.

AI introduces disruption risk across every sector, so private credit underwriting has moved from broad sector calls to company-specific moats. The UK is the main testing ground, accounting for 27.8% of European direct lending activity in the first quarter of 2026.

David Hirschmann, co-head of Permira Credit, says underwriting now centers on whether a borrower can embed AI into its operations and defend its market position. Lenders are weighing workflow integration, proprietary data assets, regulatory barriers and management adaptability, rather than treating recurring revenue as a proxy for safety. David Miles, leveraged finance partner at Mayer Brown, notes that commercial diligence now sorts borrowers into clear beneficiaries and vulnerable targets. That split drives capital allocation.

The divergence is already reshaping deal terms. High-risk targets face lower leverage, tighter EBITDA adjustments, higher spreads and strict covenant packages. Software credits with commodity risk, such as basic customer service platforms or simple content tools, face pressure on pricing power and debt capacity.

Sophos shows the selectivity. Multiple private credit funds passed on a $2.5 billion refinancing for the Thoma Bravo-backed company, pushing it toward an amend-and-extend on its existing facility. Deeply embedded platforms, by contrast, still draw aggressive capital. Ares provided a $175 million unitranche at roughly 7x EBITDA for Nordic Capital’s buyout of trade surveillance specialist TradingHub in March.

Scale matters too. Lower mid-market companies risk falling behind if they lack the balance sheet to fund ongoing technology investment, while larger platforms can treat AI as an operating lever. Private equity sponsors, meanwhile, are concentrating capital behind defensible models instead of rescuing structurally challenged businesses with bigger equity checks.

The 2027–2028 maturity wall is the next test. Those capital structures were set before AI factored into customer retention, pricing power and exit multiples. Performing credits should still find routes to refinance, but their debt packages are likely to carry faster amortization, tighter information rights and structured purchase mechanics such as earnouts and deferred consideration. For private credit providers focused on capital preservation, the mandate has shifted from picking market winners to avoiding businesses vulnerable to technological obsolescence.

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