John Zito of Apollo Global Management LLC left a room full of investors stunned. During a speech at an event in Toronto last autumn, he stated that the real threat facing the private capital markets was not tariffs, inflation, or persistently high interest rates. Instead, he said, "The real risk is: Is software dead?" Zito's previously unreported remarks directly challenged one of the private equity industry's most deeply entrenched assumptions. For years, investors have poured hundreds of billions of dollars into software companies, betting on their stable growth and resilient recurring revenues. However, the artificial intelligence revolution is now testing this very foundation. As concerns intensify, companies including Arcmont Asset Management and Hayfin Capital Management have hired advisors to scrutinize their portfolios for potentially vulnerable businesses, according to people familiar with the matter. Apollo Global Management LLC reduced its direct lending fund's exposure to software by nearly half in 2025, cutting it from approximately 20% at the start of the year. The uncertainty over who the ultimate winners and losers will be is unsettling multiple markets. On Tuesday, stocks deemed susceptible to AI disruption fell after Anthropic released a new tool, heightening fears of corporate upheaval. In recent days, Blue Owl Capital Inc. disclosed significant outflows from a tech-focused fund, and two European software companies shelved loan transactions. While many business models face threats, Software-as-a-Service (SaaS) is particularly vulnerable. AI-native companies often offer faster, cheaper solutions, meaning firms once in relatively safe lanes now face competitive risks from new entrants. Anthropic's Claude Code and other "vibe-coding" startups enable users with no programming experience to build software, dramatically lowering the barrier to entry. This shakes up rigid, cookie-cutter product models and impacts traditional SaaS. "Tech private equity in its current form is dead," said Isaac Kim, a partner at venture firm Lightspeed, in a recent LinkedIn post. He previously led the tech private equity business at Elliott Investment Management. The software industry has long been a prime target for buyout firms and private credit lenders. According to compiled data, from 2015 to 2025, over 1,900 software companies were acquired by private equity buyers in deals totaling more than $440 billion. Investment committees readily approved these deals because the model was simple. Revenues were considered "sticky" due to technology being deeply embedded in business operations, supporting everything from payroll to HR, while subscription models promised predictable cash flows. But now, lenders are focusing on how potential borrowers are responding to new technological challengers, people familiar with the matter say. This has become the first question asked of software company executives in loan meetings, they indicated. Kim noted in his post that buying a software firm, improving its margins, and adding leverage "assumes the underlying product maintains its market position long enough for the financial engineering to work. But AI changes that assumption." Last year, two outsourcing firms, KronosNet and Foundever, ran into trouble as investors intensified their AI scrutiny. Debt for both companies now trades at distressed levels. Bonds of other software companies, including McAfee and ION Platform Investment Group, have also plummeted. Also in 2025, the credit arm of CVC Capital Partners took over contact-center support business Sabio Group after its previous owners struggled to find a buyer. "I think everyone's focused on bubble risk, but the biggest risk is actually disruption risk," said Jon Gray, President of Blackstone. "What happens when an industry changes dramatically overnight? Just like what happened to the Yellow Pages industry after the internet emerged in the 1990s." In private markets, highly indebted companies have been seeking leniency on their borrowings, while some prominent lenders have marked down the value of loans to software companies like Edmentum and Foundever, some even to distressed levels. Equity market sentiment has grown increasingly pessimistic. The S&P North American Software Index fell 15% in January, its largest monthly drop since October 2008. Private credit's exposure to the software sector is likely far greater than some data suggest. Barclays estimates that so-called Business Development Companies (BDCs)—investment funds that lend directly to companies—have about 20% of their portfolios tied to the industry, though some believe the figure is much higher. "If a software business is in healthcare, the fund will classify it as healthcare exposure," said Robert Dodd, an analyst at Raymond James. "Software exposure is significantly higher than it appears." Another concern is the asset-light nature of the software industry. With fewer physical assets to recover losses from, this could mean greater potential losses. Zito's recent comments reflect a shift in the assessment of the threat posed by AI. Back in 2022, shortly before Hellman & Friedman and Permira acquired Zendesk Inc. for just over $10 billion, the software company's board outlined its risks. They cited a potential recession, persistent high inflation, and economic headwinds. What was not mentioned: Artificial Intelligence. Little more than a week after the deal closed in November 2022, ChatGPT launched. But companies are not standing idly by in the face of this threat. Many have integrated AI into their own operations, and for those who deploy it effectively, AI can be highly beneficial. For instance, Zendesk's internally developed AI product now generates over $200 million in annual recurring revenue, accounting for 10% of its income, according to a person familiar with the matter. Some companies anticipate AI will help them reduce costs. Brian Ruder, Co-CEO of Permira, acknowledged the risks exist but believes concerns are overblown. "Looking back at previous technology platform shifts, history tells us that in the interplay between AI-native applications and existing SaaS applications, there will be winners and losers on both sides," he said. During the boom, star companies like Coupa Software and Cloudera traded at price-to-earnings ratios approaching 60 times, according to Pitchbook data. In 2025, the average multiple for SaaS company acquisitions by private equity fell to 18 times, down from 24 times the previous year. Robin Doumar, founder of private credit manager Park Square, stated that the software industry's "aura of invincibility" is outdated, and metrics like extremely high P/E ratios "defy financial logic." "I hope that chapter is over."
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