Software was private credit’s perfect borrower.

But as AI begins to commoditize it, the investment thesis is starting to crack.

With valuations sliding and investors growing nervous, private credit’s big bet on software is facing a reckoning.

Software businesses, specifically Software-as-a-Service (“SaaS”), became a favorite target of private markets due to predictable subscription revenues and strong cash flows.

Riding covid-era tailwinds, private equity activity in the sector peaked in 2021 amid frothy valuations and aggressive deal terms.

For private credit, this drove heavy deployment, especially as the broadly syndicated loan market remained largely shut.

As a result, private credit’s exposure to software roughly doubled over the last decade (mostly from the post-2020 surge in activity).

Today, software accounts for ~20% of private credit loan exposure, up from ~10% in 2016.

Concern over AI disruption has triggered a reassessment of risk across the market.

In 2025, SaaS valuation multiples fell ~25%, and the recent market stress has pushed them even lower.

For private credit, the deteriorating sentiment has a direct impact on collateral values.

Software is an asset-lite business. There are no factories or inventory to liquidate.

Instead, credit investors rely on the intangible value of the business as collateral.

In a downside scenario where AI significantly erodes demand for existing software, credit investors could take meaningful losses.

For private credit, the disruption in software is only the latest in a string of bad press.

Rising defaults and PIK usage, as well as several high profile fraud cases, have fueled speculation about potential systemic weakness in the asset class.

The concerns around software have only added to the pressure.

But it’s important to note that reported defaults remain moderate, and funds have held up relatively well so far.

The real test will be how AI disruption actually materializes over the next several years, compared to the market’s ominous outlook.

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