Software sell-off sparks credit fears, but experts say debt is safe

The software sell-off has fuelled concerns over private credit exposure, but experts warn that the panic is exaggerated as not all software firms are the same and debt is senior in the capital stack.

The future viability of software as an industry – and investment opportunity – was thrown into doubt earlier this month when artificial intelligence (AI) start-up Anthropic released a series of new tools set to upend the sector.

The S&P North American software index has posted daily declines of more than four per cent three times in the past few weeks and is down more than 20 per cent this year.

These market jitters have had a knock-on impact on private credit, as software companies have been a favourite target of private credit lenders and have become the most represented sector in both middle-market collateralised loan obligations (CLOs) and business development companies, according to data from S&P Global.

Overall, software is the largest sector in the US broadly syndicated loan market and middle-market CLOs, accounting for 15 per cent and 19 per cent of total assets by par, respectively.

While analysis by Moody’s estimates that software providers make up 10 per cent of US CLO assets and six per cent of European CLO assets, this is a significant concentration second only to high tech, business services and finance.

As a result, the market reaction has spilled over to business development companies exposed to software, with the likes of Apollo, Ares, KKR and TPG seeing a sell-off of their listed vehicles. However, it should be noted that this is indicative of wider market sentiment rather than a deterioration in portfolio quality.

Speaking to those in the sector, many have pointed out that the “black and white” picture of what has been dubbed a “SaaSapocalypse” has been exaggerated. They warn that with market volatility, it is never wise to panic and “throw the baby out with the bathwater”.

For one, James Staunton, head of structured finance at Berenberg Asset Management, told Alternative Credit Investor that AI and its impact, while still largely unknown, has not been neglected by managers.

Overall, he argued that just because software prices have fallen, reducing enterprise valuations and equity positions slightly, this does not directly translate into widespread defaults for private credit.

“The threat of AI has been on the minds of the industry for the last 18–24 months,” he said. “There would have been due diligence into that.

“It’s a big jump for me to say that we’ve had a slight re-evaluation in the overall enterprise value of software and that means that private credit has a bunch of defaults that it is looking at in the near future.”

Read more: Private credit leaders unshaken by software sell-off but warn on fiscal risk

Software companies aren’t equal

Industry bosses, such as Jon Gray, president and chief operating officer of Blackstone, have been quick to point out that not all software businesses are created equal, a view backed by Marc Rowan, chief executive of Apollo Global Management.

Rowan last week told analysts on a conference call that “software is an amazing business and the market’s overreaction to software is extreme”.

“We have good software companies and bad software companies, we have good valuations and bad valuations,” Rowan said. “If you were aggressive at a point in time, when valuations were very high, and not a lot of due diligence was being done, and people were expecting growth forever, you are playing defence now. But I assure you, we are on offence and software will continue to be an attractive sector.”

He added that software accounted for less than two per cent of $938bn (£687.9bn) Apollo’s assets under management, tabulating the firm’s minimal exposure by group “rounds to zero” in private equity, and “rounds closer to zero than to one” in portfolios held by insurance unit Athene, he said.

Blackstone’s Gray, in one of his LinkedIn videos last week, referenced the difference between “vertical” and “horizontal” software businesses, with the former being “systems of record, very hard to move, real moats, they are more protected”, while the latter is associated with more risk.

Speaking to Alternative Credit Investor, Michelle Handy, chief investment officer of direct lending at Napier Park Global Capital, part of $208bn First Eagle Investments, reiterated this viewpoint.

“I do think there are components of AI that will have different impacts on different parts of the overall software space,” she said. “Some will be hit earlier, opposed to software that is fundamentally integrated into the overall operations of the business. Both are very, very different.”

Despite concerns, many software companies have been resilient over the past year, with 80 per cent having reported revenue growth and 70 per cent reporting EBITDA growth. Furthermore, credit upgrades in the software sector have been strong, leading the portfolio in 2025, according to S&P Global.

“The overall picture, when you dig down into it, is that there may be certain software companies underwritten by private credit which will be more badly hit by AI than others,” said Staunton. “I suspect the outcome will be slightly poorer performance by them, but I don’t think there is a wave of defaults coming our way as a result of that, particularly because these underlying businesses are very careful, heavy and strong.”

Read more: KBRA: AI risks to private credit extend beyond tech companies

The importance of the capital stack

Senior debt’s position in the capital stack also helps to protect private credit firms more than equity investors for example, stakeholders argue.

Staunton stated that software is usually a long-term process and very embedded, so this AI issue will hit private equity firms harder as valuations and potentially underlying profits deteriorate.

“That will flow through on an ad hoc basis to certain private credit funds or assets underwritten by a private credit fund,” he added. “But, as I said, I don’t see a large default wave arising ahead of that.”

Overall, Staunton does not see private credit having a lower share of software going forward, as it remains an attractive sector.

“The only differential it will impact is leverage: instead of seven, it will be five or 5.5,” he said.

“Private credit markets and all markets have shown an ability to adapt over the years, and that will be the case with this development.”

Ultimately, it is important to distinguish between market panic and long-term investment value, Gray affirms.

“The final position, in these heights of high volatility, we have seen it with tariffs, people often panic, investors throw the baby out with the bathwater,” he said. “We want to take a long-term view; when these moments happen, look at the opportunity.”