The software industry is confronting an existential crisis triggered by artificial intelligence, with the shockwaves now transmitting to the private credit market, creating a dangerous negative feedback loop. Goldman Sachs data reveals that the S&P North American Software Index has fallen for three consecutive weeks, plummeting 15% in January to mark its largest monthly decline since October 2008. This panic intensified further this past Tuesday when AI startup Anthropic released a productivity tool for corporate in-house lawyers, causing share prices of legal software and publishing companies to tumble.
Jeffrey Favuzza from Jefferies' equity trading desk described the current situation as a "SaaS Doomsday," pointing out that the prevailing trading style is entirely one of panic selling characterized by a "get me out at any cost" mentality, with no signs of a bottom in sight yet. This shock has not been confined to the stock market and is rapidly spreading to the private credit sector, which provides substantial financing to the software industry. Analysts at Barclays noted that the software industry represents the largest exposure for Business Development Companies (BDCs), accounting for roughly 20% of their investment portfolios, with the total size reaching approximately $100 billion by the third quarter of last year. As software company valuations collapse, share prices of BDCs like Blue Owl, Blackstone, and Ares have all declined.
Analysis from J.P. Morgan and Goldman Sachs indicates the market is experiencing an unprecedented divergence: on one side are semiconductor companies seen as beneficiaries of the AI super-cycle, and on the other are software companies viewed as the biggest losers. As software equity valuations crash, private credit firms face pressure to revalue their balance sheets, which could subsequently lead to tighter credit conditions. This, in turn, would further squeeze the growth prospects of software companies already facing a survival crisis, forming a "death spiral." Software stocks are being subjected to panic selling. Pessimistic sentiment towards the software sector has been brewing for months, and the release of Anthropic's Claude Cowork tool acted as the catalyst that ignited the panic. Investors fear that as AI technology advances, the moats of traditional software companies will become increasingly shallow, their pricing power will be compressed, and they may even face the risk of complete obsolescence. Jeffrey Favuzza of Jefferies mentioned that a "harsh view" exists in the market, suggesting the software industry's future could resemble that of "print media or department stores." While highly attractive buying opportunities may emerge in the long run, investors currently lack conviction to enter the market even after substantial selling. Thomas Shipp, Head of Equity Research at LPL Financial, also pointed out that the uncertainty introduced by AI has widened the range of potential growth outcomes for software companies. This makes it difficult for the market to assign them reasonable valuations and to determine what constitutes "cheap." Goldman Sachs data further corroborates this panic: the divergence in hedge fund positioning between semiconductor and software companies has reached a historical extreme. Meanwhile, FactSet data shows that although some companies still pass their earnings tests, the pass rate is declining, masking a fierce internal process of survival of the fittest beneath the surface of overall healthy data.
Private credit holds a hundred-billion-dollar risk exposure. The meltdown in the SaaS sector is not just a stock market issue but also a latent danger for the bond market. Barclays analyst Peter Troisi noted in a report that the BDC industry is particularly sensitive to declines in software stock and credit valuations. As of the third quarter of last year, the total exposure of BDCs to the software sector was approximately $100 billion. This risk exposure creates a dangerous linkage between private credit and software companies. As the equity value of software companies shrinks, BDCs, acting as lenders, face pressure to write down assets. Recent stock price fluctuations at major institutions like Blue Owl, Blackstone, and Ares reflect market concerns about this contagion effect.
Kabir Caprihan, a credit analyst at J.P. Morgan, stated in a recent report that although BDC management teams have been assessing and stress-testing their software exposures for over a year, the market's reaction indicates investors fear any turmoil in the software sector will give BDCs a "cold." Currently, software loans account for about 16% of the BDC loan portfolio tracked by J.P. Morgan, totaling roughly $70 billion. UBS strategists have warned that if AI causes aggressive disruption for corporate borrowers, the default rate in US private credit could surge to 13%.
Stress tests and specific asset risks. To quantify potential losses, J.P. Morgan conducted stress tests on BDC portfolios. Under a simple hypothetical scenario (where 33% of companies default and 33% become zombie companies), this could mean the 30 tracked BDCs would face $22 billion in losses, reducing their net asset value by 11%. In a more extreme "harsh scenario" (75% default rate, 10% recovery rate), cumulative net losses could approach $50 billion, diluting book value by 24%. Specific loan assets are already showing signs of stress. The J.P. Morgan report highlighted significant discrepancies between the trading prices of some software loans in the secondary market and their valuations on BDC books:
Cloudera: Held by NMFC and BCRED, with an average book valuation of about 97, but recent secondary market prices have fallen to around 85. Cornerstone OnDemand: Held by six BDCs including Blue Owl, its term loan price has dropped approximately 10 points since November 2025, trading around 83, while the average BDC book valuation remains at 97. Finastra: Held by nine BDCs, trading prices have fallen to 88, while the average book valuation is 101.
J.P. Morgan believes that while it's difficult from the outside to discern which software companies will survive, it's clear that not all BDCs will be equally impacted. Institutions with lower leverage (like OTF) may possess greater resilience when facing asset write-downs. However, the current market sentiment suggests investors prefer to sell first and wait for clarity later, putting the private credit market through a severe test reminiscent of the pandemic or geopolitical crises.
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