MarketMoodz
AI Reckoning Forces Private-Credit to Rethink Software Bets
Private-credit lenders are re-evaluating software exposure as AI reshapes which vendors keep pricing power and which face obsolescence. Firms including Ares, Man Group and HarbourVest say AI is driving a bifurcation in the software market that’s already changing spreads, covenants and loan sizing.
Key Takeaways
- Private credit’s exposure to software ran roughly 20%–30% on average over the past five years, per Man Group.
- Lenders report widening spreads, tighter documentation and lower loan-to-value ratios as they price AI-driven risk into software deals.
- Ares, Man Group and HarbourVest expect a K-shaped outcome in software: mission-critical, high-switching-cost vendors hold up while others face severe headwinds.
- The term 'SaaSpocalypse' has resurfaced in market conversations, though executives say software demand won’t disappear and some firms will adapt and grow.
- Public software equities rebounded recently—iShares’ expanded tech-software ETF was up ~21% in May and ~9% over three months—highlighting divergent public-market performance.
People Involved
- Blair JacobsenAres private-credit executive
- Kevin MarchettiMan Group credit executive
- John ToomeyHarbourVest Partners investment executive
Entities Involved
- Ares ManagementPrivate-credit lender with long-standing software investments
- Man GroupAlternative-asset manager tracking private-credit software exposure
- HarbourVest PartnersPrivate markets investor commenting on AI adoption in software
- iShares Expanded Tech-Software Sector ETFPublic benchmark showing recent software equity gains
- SuperReturn InternationalPrivate equity conference where industry views were discussed
MarketMoodz Analysis
For investors, the immediate implication is credit selection and deal terms will matter more than ever. Lenders are already widening spreads, tightening documentation and reducing loan-to-value ratios on software loans to compensate for the risk that AI accelerates incumbents’ decline. That shifts private-credit alpha from pure yield capture toward underwriting skill: identifying mission-critical software with high switching costs—often in regulated or legacy-heavy industries—will preserve recoveries and steady cashflows, while commoditizing vendors face higher funding costs and default risk.
This is not a replay of a total market collapse; executives note demand for software remains substantial, and public software names have shown a strong bounce recently. Still, the current moment resembles prior tech reckonings where capital reallocated quickly toward durable business models and away from hype-driven growth. Private credit’s sizeable footprint in software—about 20%–30% exposure over the last five years—means repricing has material portfolio-level effects, particularly for managers concentrated in technology lending.
What to watch next: loan-level metrics (spreads, covenant packages and LTVs), subsector outcomes (core infrastructure and regulated vertical SaaS versus horizontal commodity tools), and public-market signals. If spreads continue to widen and documentation tightens broadly, expect deal volumes to fall and distressed opportunities to rise; if AI proves a productivity tailwind for legacy industries, lenders with exposure to those 'old economy' use cases could see better-than-expected performance. Investors should pressure-test private-credit holdings with scenario analyses that model both K-shaped borrower outcomes and varying recovery rates.
Source: Original Article