Even before the so-called SaaS selloff, software firms have been grappling with the challenge of repaying their private debt.
Analysis provided by MSCI reveals that the proportion of private software debt valued at less than 80% of its original worth hit a five-year peak last year. This figure peaked at 6.1% at the end of September, roughly five months before software company shares plummeted on fears that their businesses could be rendered obsolete by artificial intelligence tools.
According to Gil Luria, head of technology research at DA Davidson, a significant portion of these loans were likely originated in the years following the COVID-19 pandemic. During that period, employers invested heavily in new tools to facilitate remote work, fueling a surge in software sales. Software companies borrowed against these revenues, often at the behest of their private equity parent firms. While employers eventually scaled back their spending, the debt obligations remained.
"Software companies were taken private with very high leverage, assuming these revenues would last forever, even as private equity managers cut costs across all these companies," Luria stated.
The MSCI data offers a rare glimpse into the $2 trillion private credit market, a universe of less liquid debt securities and funds that have become core holdings for numerous pension funds, sovereign wealth funds, and insurers seeking higher yields. Typically, outsiders can only gauge the dynamics of this opaque market through publicly traded private credit funds marketed to individual investors.
However, MSCI analyzed $73 billion in holdings from pension funds, university endowments, and other institutional investors who receive MSCI's private market return statistics and other data. When MSCI analysts isolated the private loans these investors made to information technology companies, they found the proportion of debt written down by more than 20% climbed to 6.1% from 4.8% a year earlier.
This impairment rate eased to 4.7% in the fourth quarter but remained above the five-year quarterly average of 4.4%. Patrick Warren, head of private credit research at MSCI, suggested there is reason to believe conditions could deteriorate further. He estimates that private markets can take up to two quarters to fully reflect the impact of certain developments, whereas public markets typically price them in immediately.
This implies that last year's record declines did not capture the full extent of fears that AI agents, such as Anthropic's Claude Cowork launched in January, could displace traditional software tools. These fears triggered the "SaaS selloff," as the selling pressure appeared to hit companies providing software-as-a-service, like Adobe Inc (NASDAQ: ADBE) and Salesforce Inc (NYSE: CRM), the hardest. The iShares Expanded Tech-Software Sector ETF, which holds SaaS stocks, fell 24% in the first quarter before recovering some ground with a 13% gain in the second quarter.
"Even when we get the first-quarter data, we may not have a full picture of the market's reaction to Claude Cowork. The data lag keeps us in suspense," Warren noted.
Analysts say this reaction has not yet manifested in the public bond market, as the software sector represents a relatively small portion of that market. However, MSCI's data indicates that IT loans are constituting a growing share of private credit portfolios.
According to MSCI, software debt accounted for 17% of institutional investor debt by the end of 2025, second only to industrial companies and up from 12% in 2019. The share is even higher, averaging around 25%, across four major business development companies (BDCs) marketed to individual investors. Retail investors have been pulling money from BDCs, partly due to concerns that older IT tools may become outdated, putting pressure on software borrowers.
The MSCI data also shows broader intensifying pressure across private credit following three years of high interest rates. Last year, the proportion of healthcare debt written down by over 20% reached 7.4%, a five-year high. Loans to consumer goods companies selling non-essential items, such as vacations and dining, saw their largest write-downs since the early stages of the pandemic.
Some credit stress is already becoming visible. Reports indicate that UK mortgage lender Market Financial Solutions is facing insolvency and fraud allegations, potentially leading to losses for lenders including Atlas SP Partners, owned by Apollo Global Management Inc (NYSE: APO), and others. Furthermore, first-quarter single-loan valuations for BDCs are public, as they face stricter reporting requirements than institutional funds.
The Blackstone Secured Lending Fund (NYSE: BXSL) wrote down a loan to healthcare company Navigator Acquiror to 80 cents on the dollar, a loan representing 3.5% of the fund's net asset value. Defaults by software maker Medallia and dental services company Affordable Care led FS KKR Capital Corp (NYSE: FSK), a BDC managed by KKR, to write down $560 million, equivalent to 10% of that fund's net asset value.
Both Marc Rowan, CEO of Apollo, and Jon Gray, President of Blackstone Inc (NYSE: BX), have stated that concerns about widespread stress in the private credit sector are exaggerated.
Warren noted that, perhaps counterintuitively, MSCI's data shows private credit funds managed by more experienced managers have not demonstrated significantly better performance. However, the data does indicate that larger funds hold less written-down debt than their smaller counterparts.
"Smaller funds tend to lend to smaller borrowers, who are more susceptible to pressure in a higher interest rate or tougher macroeconomic environment," he explained.
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