An ongoing selloff in software companies is sparking concern in the private credit market, which is highly exposed to the sector — and inspiring rebuttals from private credit giants like Ares and Thoma Bravo.

Public equities and syndicated loans have been pummeled over recent weeks amid concerns that AI technology will disrupt traditional SaaS businesses, as so-called ‘vibe-coding’ tools and agentic AI technology threaten to shake up the software space.

Private credit is less vulnerable to the mark-to-market whiplash of more liquid debt instruments like loans and bonds, and private equity sponsors don’t have to suffer the daily tyranny of the public equity markets. Still, the selloff comes at an awkward time for both: there is heightened scrutiny of opaque private credit valuations after the collapse of Tricolor and First Brands last year, and private equity was just starting to look forward to a rebound in M&A after a long period during which exits were constrained.

A meaningful chunk of the syndicated leveraged loan universe is software, but private credit is even more exposed.

The IT and communications sector accounts for between 20% and 25% of private credit deals 9fin tracks in our quarterly data reviews. While public BDCs issue more loans to software firms (20%) than to any other sector, per Barclays latest research.

Traditionally, lenders have been attracted by software’s sticky revenue, high margins, and healthy free cash flow.

Those assumptions have been thrown into doubt by the selloff. With BDC earnings season kicking off this week, investors are on the lookout for any evidence to quantify (or indeed, to dispel) the market’s fears about the impact of AI on these businesses and on private credit as a whole.

“Private credit exposure to software makes you question the risks, what your blindspots are, and perhaps even want to re-underwrite some of the most exposed names,” one lender said.

Among the BDCs most exposed to software, according to Barclays research, are:

• Blue Owl Technology Finance (OTF) at 55%
• Sixth Street Speciality Lending (TSLX) at 53%
• Goldman Sachs BDC (GSBD) at 43%