Private credit lenders are confronting a significant challenge as artificial intelligence (AI) reshapes the software sector, prompting investors to reassess their substantial exposure to software companies. According to credit managers at firms such as Ares, Man Group, and HarbourVest, AI is driving a 'K-shaped' outcome in the industry, where resilient, mission-critical software firms are expected to thrive while others may struggle or face disruption [1]. Despite earlier concerns about a 'SaaSpocalypse'—a widespread collapse of software companies—Ares co-president Blair Jacobson stated that the firm was aware of the risks but did not view them as a major surprise [1].
Jacobson noted that the conversation around AI's impact has evolved since a sharp tech sell-off in February, which was triggered by fears that AI would render much software obsolete. In response, software stocks have rebounded, with the iShares Expanded Tech-Software Sector ETF surging 21% in May and rising 9% over the past three months [1]. This recovery reflects a growing consensus among investors that AI will create both winners and losers, rather than causing a sector-wide collapse. Loan and bond prices, as well as equity prices for software companies, have shown this bifurcation, presenting both opportunities and risks for credit investors [1].
Ares, which has invested in software for over 15 years, sees particular opportunity in companies providing mission-critical services, such as enterprise resource planning systems in regulated industries. Jacobson emphasized that the high cost of switching or failure in these areas offers a protective buffer for stronger software businesses, even as AI disrupts the broader market [1]. As a result, Ares continues to lend to software companies, observing that spreads are widening, documentation is tightening, and loan-to-value ratios are decreasing. These dynamics are viewed as attractive for credit investors [1].
Private credit has become a major source of capital for the software sector, with alternative lenders' exposure growing to between 20% and 30% on average over the past five years, according to Kevin Marchetti, chief investment officer and head of U.S. direct lending at Man Group [1].
CONCLUSION
AI is reshaping the software sector, forcing private credit lenders to distinguish between resilient and vulnerable business models. While fears of a 'SaaSpocalypse' have subsided, investors expect a bifurcated market with both risks and opportunities. The sector's recovery and tightening credit conditions suggest a cautious but optimistic outlook for mission-critical software companies.