Private credit lenders with significant exposure to the software sector are confronting a major test as artificial intelligence (AI) disrupts traditional assumptions about software growth, pricing power, and borrower durability [1]. Prominent credit managers, including Ares, Man Group, and HarbourVest, told CNBC that the rise of AI is not expected to trigger a 'SaaSpocalypse'—a widespread collapse of software companies—but will instead create a 'K-shaped' sector, separating resilient, mission-critical software firms from those with more vulnerable business models [1].
Blair Jacobsen, co-president of Ares, noted that concerns about a software apocalypse emerged earlier in the year, particularly after a sharp tech sell-off in February driven by fears that AI would render much software obsolete [1]. However, software stocks have since rebounded, with the iShares Expanded Tech-Software Sector ETF surging 21% in May and rising 9% over the past three months [1]. Jacobsen emphasized that the narrative has shifted: 'Now there's a view there will be winners and losers,' with some companies able to adapt to AI and others facing greater challenges, as reflected in loan, bond, and equity prices [1].
Jacobsen highlighted that Ares sees opportunities in companies providing mission-critical services, such as enterprise resource planning systems in regulated industries, where the cost of switching or failure is high, offering these businesses a layer of protection even as AI disrupts the broader market [1]. He added, 'The cost of failure is very high, so again we think we're going to see more bifurcated outcomes' [1].
Despite the upheaval, private credit lenders continue to finance software companies, with industry dynamics leading to wider spreads, tighter documentation, and lower loan-to-value ratios—conditions that Jacobsen described as 'very, very attractive' for credit investors [1]. Private credit's exposure to the software sector has grown to between 20% and 30% on average, underscoring the significance of this trend [1].
CONCLUSION
The AI-driven transformation of the software sector is prompting private credit lenders to differentiate between resilient and vulnerable business models, rather than anticipating a sector-wide collapse. While risks remain, the current environment is creating attractive opportunities for credit investors, especially in mission-critical software companies. Market sentiment has improved since earlier fears, with software stocks rebounding and lenders adapting to new industry dynamics.