Private equity’s software portfolios are heading into a capital reset. AI has changed what the market believes software will be worth at maturity, and the repricing has arrived just as the largest wave of technology buyout debt on record approaches its refinancing window. The gap between what these companies borrowed and what lenders now believe they are worth has become the defining balance sheet conundrum in private markets, and the sponsors who adopt a proactive approach with their lenders, will be positioned to exit on their own timelines.
The repricing has a clear cause. For a decade, lenders financed software buyouts at premium leverage because recurring revenue, high margins, and strong retention made the sector look like the safest credits in leveraged finance. AI has undermined the assumption that those qualities are permanent, lowering the cost of building software to the point where products without defensible intellectual property can be replicated, and giving corporate buyers reason to consolidate vendors, scrutinize every renewal, and ask what they can replace outright. A separation is widening between companies whose proprietary data and embedded workflows gain value as AI is layered onto them, and companies whose products now compete with software their own customers can build.
Credit markets have already rendered their verdict. Software BSL loans now trade at spreads of roughly 300 bps wide of the leveraged loan index, and lenders require a significant premium for a sector recently treated as a safe haven. That pricing would matter less if the sector’s debt had further runway until maturity, however, given much of it is coming due in 2028 and 2029, action will need to be taken soon by companies. New buyouts between 2021 and 2023 generated roughly $257 billion of primary leveraged loan issuance, about a quarter of which financed technology deals, and that debt is now maturing into a market with slower M&A, limited exit activity, and lower enterprise values. This same dynamic is occurring in the private credit market as well given the reluctance of lenders to refinance SaaS based ARR loans at the same level they initially had.
For lenders holding those maturities, the arithmetic has changed. A loan underwritten against a 2021 valuation can sit at a far higher loan-to-value today even when the business has performed, because the equity cushion has compressed. Often, lenders and borrowers can buy time with amendments, wider spreads, and PIK features, and in a cyclical downturn buying time is often the right answer. The doubt hanging over software concerns terminal value itself, and when the open question is what the enterprise will be worth in five years, delay stops being neutral. Rational lenders will extend only alongside genuine risk reduction, which in practice means debt paydown funded by new capital.
This “right sizing” of the capital structure is the work now in front of sponsors. For businesses with durable fundamentals, the most efficient bridge is structured capital. Instruments in this family, preferred equity, Holdco-PIK notes and convertible structures among them, deliver the debt paydown lenders need to see and reset loan-to-value at levels they can underwrite, with limited dilution and a limited surrender of governance rights.
While the current private debt market dislocation has created financing issues for PE Backed software companies, PE investors with a sleeve of capital focused on deep value investments have a genuine opening to acquire high-quality software assets at valuations that have not been available for quite some time. The underwriting burden sits on the buyer’s ability to assess a company’s intellectual property, its data assets, its customer relationships and other moats in a market where AI keeps lowering the cost of competing. Buyers who bring that capability will convert the sector’s stress into ownership of solid businesses at sensible entry points.
Serious people disagree, and software has absorbed dire predictions before. When rates rose in 2022, similar warnings circulated, lenders extended, and the feared default wave never arrived. Skeptics can add that AI may lift incumbent margins enough to repair loan-to-value on its own, and that lenders with little appetite for crystallizing losses will amend and extend as they always have. The difference now is the nature of the doubt. In 2022 the problem was the price of money and the enterprise’s value was never seriously in question, so extensions let time do the repairing. Today, the question is the enterprise value itself, lenders have already withdrawn the benefit of the doubt in their pricing, and every efficiency AI gives an incumbent it also gives the competition. Even if the sector-level fear proves overdone, dispersion will do the sorting one company at a time, and no sponsor can average its way past a specific maturity date.
I have spent more than two decades financing sponsor transactions across the capital structure, and periods like this one reward the same behavior. Sponsors who get ahead of the maturity wall and take a proactive approach with their lenders, arriving with a credible plan and new capital behind it, will be well positioned for an exit when markets reopen. Conversely, for situations already under stress, the nuances of distress M&A are unforgiving, and having a highly experienced advisor at the table is paramount. None of this diminishes the sector. Software remains one of the best business models ever invented, and its future is still worth financing. That future is simply no longer what it used to be, and the capital structures built on the old paradigm need to be rebuilt around the one actually coming.
