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Private equity's software bets face AI threat

Source: economist.com

TL;DR

Private-equity firms face trouble from AI tools threatening their software investments.
Listed software firms lost a fifth of value this year amid fears of AI disruption.
Over $500bn in software-related debt risks defaults, echoing past energy sector woes.

The story at a glance

Private-equity buy-out funds heavily invested in enterprise-software firms with recurring revenue during the 2010s, spending one in every three dollars on technology. Higher interest rates since 2022 and AI-coding tools like Anthropic’s Claude now threaten those assets, with public-market sell-offs spilling into private lending. The article, in The Economist’s Schumpeter column, warns of leveraged bets unravelling as AI erodes incumbents’ moats.[[1]](https://www.economist.com/business/2026/02/12/private-equity-barons-have-a-giant-ai-problem)[[2]](https://www.linkedin.com/posts/marilia-katras-1581521_private-equity-barons-have-a-giant-ai-problem-activity-7428884410818666496-uNx4)

Key points

In the past decade, buy-out funds spent one in every three dollars on technology firms, drawn to subscription-based software’s steady cash flows.
Central banks’ rate rises in 2022 hurt leveraged deals; now AI tools like Claude let customers and startups bypass traditional providers in marketing, legal tech, and financial data.
Value of listed software firms has fallen by a fifth this year, with indiscriminate selling across sectors.
Chill reaches private markets: loans to private-equity-owned software firms have tumbled, hitting funds that hold those loans and their managers.
Analysts estimate more than $500bn of borrowing tied to software firms in America’s credit markets, mainly via business-development companies (BDCs) like Blackstone’s BCRED (26% software exposure).
Applying public valuations to private-equity portfolios would halve their worth, a stomach-churning prospect.[[3]](https://www.afr.com/technology/private-equity-barons-have-a-giant-ai-problem-20260213-p5o24u)
Comparison to 2014 oil crash: heavy borrowing before price falls led to bond defaults.

Details and context

Private equity thrived on software firms’ predictable recurring revenue, buying them with debt and extracting returns. AI changes that by enabling cheap, rapid coding that undercuts niche incumbents—traders expect widespread disruption.

The biggest risk lies in debt, not equity. BDCs, often run by private-markets giants, hold large software loans; some are publicly traded, amplifying redemption pressures. Ares and Blue Owl also show high exposure (24-29%).[[4]](https://www.linkedin.com/posts/pradeeparadhya_private-equity-barons-have-a-giant-ai-problem-activity-7428113163084128256-699l)

Private markets trade infrequently, so mark-to-market lags public signals. But as debt reprices, covenant breaches and fire sales could follow.

Key quotes

“There are good reasons for private-equity bosses to downplay the importance of a business that made them rich.”[[5]](https://publicreg.vaccination.gov.ng/Resources/0TXNtv/1S9029/history-of_private-equity.pdf)

Why it matters

AI disruption plus high rates threaten a cornerstone of private equity’s returns, with ripple effects to credit markets and pensions holding those assets. Investors in BDCs and software debt face valuation cuts and liquidity strains; firms may see defaults rise. Watch BDC redemption rates and software loan repricings, though private opacity makes outcomes uncertain.