Asset managers took a beating last week as investors worried AI could turn software company loans into defaults. The selloff came after Anthropic released new AI tools that could do what many software firms charge for.
Ares Management fell 12%, Blue Owl Capital dropped 8%, KKR lost 10%, and TPG fell 7%. Apollo Global and BlackRock declined 1% and 5%. The S&P 500 only dipped 0.1%.
Software makes up a huge chunk of what private credit lenders bet on. PitchBook data shows software is 17% of business development company investments. KBRA found software accounts for 22% of debt exposure across 2,400 middle market borrowers, about $224 billion.
Private credit has been pouring money into enterprise software since 2020. Many of the biggest unitranche loans went to tech companies. Now those bets look shakier.
Apollo already cut its software exposure in half after starting 2025 with 20% of its private credit funds in the sector. The firm even shorted loans from Internet Brands and SonicWall before closing the positions.
Credit default swaps for tech companies jumped 90% since early September. Oracle’s CDS costs hit 2009 crisis levels.
UBS warns of 13% default rate in stress scenario
UBS says if AI adoption speeds up faster than borrowers can adapt, U.S. private credit defaults could hit 13%. That compares to 8% for leveraged loans and 4% for high-yield bonds in a stress scenario.
AI companies are moving into the application layer, where software firms make their money. It threatens the per-seat pricing that built Salesforce and Bloomberg. Think Amazon starting with books, then taking over retail, cloud, and logistics.
“The selling pressure reflects a deepening structural debate,” Jonathan McMullan from Schroders told Reuters. “The speed of AI advancement makes long-term valuations harder to defend, particularly as AI tools allow businesses to do more with fewer staff.”
Vista Equity Partners built an “agentic factory” last summer to add AI to portfolio companies.
Bankruptcies rise as ‘cockroaches’ warning echoes
Tech and business-services bankruptcies are rising. JPMorgan’s Jamie Dimon warned about private credit’s “cockroaches” late last year. One borrower problem usually means more lurking.
Not everyone’s panicking. JPMorgan’s Mark Murphy called it “an illogical leap” to think companies will replace entire enterprise systems with custom software. Quilter Cheviot’s Ben Barringer pointed to security and data concerns, saying “we are not yet at the point where AI agents will destroy software companies.”
Still, analysts think private credit defaults could climb 2 percentage points this year to 6%. Software is 25-35% of portfolios in listed BDCs. Admin, analytics, and back-office software face the most risk because switching costs are low.
These loans were made when software looked safe with recurring revenue and solid margins. That bet is looking worse by the day.
