Private Equity’s Giant Software Bet Has Been Upended by AI
(Bloomberg) — Apollo Global Management’s John Zito left the audience of investors stunned.
Addressing a gathering in Toronto last fall, he said that the real threat for private capital markets wasn’t tariffs, inflation or a prolonged period of elevated interest rates. Rather, he said, “the real risk is — is software dead?”
Zito’s comments, being reported for the first time, marked a forthright challenge to one of private equity’s most entrenched assumptions. For years, investors have funneled hundreds of billions into software businesses, banking on steady growth and resilient, recurring revenues. But the artificial intelligence revolution is now testing that foundation.
As worries mount, firms including Arcmont Asset Management and Hayfin Capital Management have hired consultants to check their portfolios for businesses that could be vulnerable, according to people with knowledge of the matter. Apollo cut its direct lending funds’ software exposure almost by half in 2025, from about 20% at the start of the year.
The uncertainty about the eventual winners and losers is roiling multiple markets. On Tuesday, stocks seen as vulnerable to AI dropped after Anthropic released a new tool, exacerbating worries about disruption to businesses. In recent days, Blue Owl Capital Inc. revealed huge outflows from a tech-focused fund, and two European software firms put loan deals on ice.
While various business models are threatened, software-as-a-service is particularly vulnerable. AI-native firms can often offer quicker and cheaper solutions, meaning companies that once operated in a defensible sector are now at risk of competition from new players.
Anthropic’s Claude Code and other “vibe-coding” startups are disrupting traditional SaaS by allowing users with no coding experience to build software. That’s dramatically lowering the programming skill barrier and undermining rigid, one-size-fits-all products.
“Technology private equity, in its current form, is dead,” Isaac Kim, a partner at venture capital firm Lightspeed who previously led Elliott Investment Management’s tech private equity business, said in a recent LinkedIn post.
The sector has been a hugely popular target for buyout firms and their private credit cousins. From 2015 to 2025, more than 1,900 software companies were taken over by private equity buyers in transactions valued at more than $440 billion, according to data compiled by Bloomberg.
Deals were easily waved through most investment committees because the model was simple. Revenues are “sticky” because the tech is embedded into businesses, helping with everything from payroll to HR, and the subscription fee model meant predictable cash flows.
But now, lenders are zeroing in on how prospective borrowers are dealing with the new technology challengers, according to people familiar with the matter. It’s the first question software bosses are being asked during meetings about borrowing, they said.
Buying a software business, improving margins and adding leverage “assumes the underlying product remains relevant long enough for financial engineering to work,” Kim said in the post. “AI has changed that assumption.”
Last year, two outsourcing companies, KronosNet and Foundever, fell into difficulty amid increased investor scrutiny around AI. The debt of both is now trading at distressed levels. Bond prices on other software names, including McAfee and ION Platform Investment Group, have tumbled.
Also in 2025, CVC Capital Partners’ credit unit took the keys of a contact center support business called Sabio Group after its previous owner struggled to find a buyer.
“Everyone’s focused on these bubble risks, I think the biggest risk is actually the disruption risk,” Blackstone’s Jon Gray said on Bloomberg TV. “What happens when industries change overnight, like what we saw to the Yellow Pages back in the nineties when the Internet came along.”
In private markets, debt-laden firms have sought forbearance on borrowings, and big name lenders have slashed valuations on loans to software companies such as Edmentum and Foundever, some to distressed levels.
Credit Exposure
Sentiment in the equity market has grown increasingly bearish. The S&P North American software index fell 15% in January, its biggest monthly decline since October 2008.
Private credit’s exposure to software may be much higher than some figures suggest. Barclays estimates so-called business development companies — investment funds that lend directly to firms — have around 20% of their portfolios tied up with the sector, but others say it’s substantially more.
“If your software business is in healthcare, the fund classifies it as a healthcare exposure,” said Robert Dodd, an analyst at Raymond James. “The software exposure is meaningfully higher than it looks.”
An additional worry is the software industry’s asset-light model. With less physical infrastructure to seize to try recoup money, that can mean bigger losses.
Zito’s recent comments represent a change in how the AI threat is being assessed.
Back in 2022, shortly before Hellman & Friedman and Permira paid just over $10 billion to buy Zendesk Inc., the software firm’s board of directors set out the risks the firm was facing.
They cited a potential recession, persistently high inflation and economic headwinds. Not mentioned: AI.
Just over a week after the sale closed in November 2022, ChatGPT launched.
But firms under threat aren’t just sitting back. Many have harnessed the technology themselves, and for those that do it effectively, AI could be a boon. Annual recurring revenue from Zendesk’s in-house AI offering, for example, now exceeds $200 million, amounting to 10% of revenue, a person with knowledge of the matter said. Some firms expect AI will help them to reduce costs.
Brian Ruder, co-CEO of Permira, says there are risks, but the concern has been overdone.
“If you look back at previous platform shifts in technology, history tells us there will be winners and losers on both sides of the AI-native and incumbent SaaS equation,” he said.
In the boom times, star businesses such as Coupa Software and Cloudera traded at almost 60 times earnings, according to data from Pitchbook.
In 2025, software-as-a-service firms were bought by private equity at an average multiple of 18 times, down from 24 the previous year.
The software industry’s “halo of invulnerability” has been inappropriate for some time, said Robin Doumar, founder of private credit manager Park Square, adding that metrics like huge earnings multiples “defy financial logic.”
“That chapter I hope has come to a close.”
–With assistance from Reshmi Basu, Giulia Morpurgo, Matthew Miller and Dani Burger.
(Updates with stock market moves starting in fourth paragraph)
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