Concerns that generative Artificial Intelligence could erode traditional software business models have moved from public equities into public loans and private credit, where software exposure is substantial but pricing transparency is limited. The S&P North American Technology Software Index is down 19% from the start of the year, and within the S&P UBS Leveraged Loan Index, loan prices for the software/IT sector have been falling since early January, down nearly 465 basis points since Jan. 6 to an average bid of 90.4 on Feb. 6, 2026. These declines have been steeper than in the broader leveraged loan market and have reinforced a pessimistic tone toward software credits in opaque private markets.
Private equity and direct lenders have heavily targeted software over the past decade, supported by cloud adoption, asset light models and recurring revenues. Companies in the technology and software sectors attracted $675 billion from private equity firms in 2022, up from $100 billion in 2012, and software and adjacent sectors now dominate exposure in business development companies and middle market collateralized loan obligations. Software and adjacent sectors account for 20% of the companies on an actual count basis, and on a dollar weighted basis software representation is about 19% of total assets for middle market CLO transactions and 20% for BDCs. Across roughly 325 credit estimated companies in software, health care technology and IT services, over 80% of the companies in software saw their revenue grow on a year over year basis, median revenue growth was over 10%, EBITDA grew by 28.2% on a median basis, and leverage came down by 3% on a median basis, indicating solid recent fundamentals despite valuation pressure.
Refinancing risk is building for some borrowers as higher rates and potential Artificial Intelligence disruption intersect with a sizeable maturity wall. About 20% of the loans issued by credit estimated companies from software, health care technology and IT services have their maturity in the next two years, while about 40% of the maturities fall in 2030 and beyond, creating both near term and long dated refinancing challenges if business models do not adapt. At the same time, structural protections in BDCs and middle market CLOs provide meaningful cushions: BDC portfolios and MM CLOs are largely invested in first lien, senior secured loans with higher equity capitalization in software deals, and only 11 MM CLO tranche ratings, less than 1% of total MM CLO ratings, have been downgraded over the past six years including during the pandemic. Stress tests indicate resilience even under a scenario where 30% of loans default in each MM CLO with a 35% recovery assumption, as no ‘AAA’ rated MM CLO tranche was downgraded below ‘BBB+’ and 94% of the nondeferrable ‘AA’ rated CLO tranche ratings remained investment grade. The impact of Artificial Intelligence is expected to vary widely by sector and regulation, with less regulated, data shareable businesses facing faster deployment and greater risk of legacy software displacement, while regulated industries with sensitive data adopt more slowly, making the ultimate credit impact highly differentiated across portfolios.
