As investors sour on software, private credit loans come into sharp relief

Many of the largest unitranche loans — the favorite structure of the private credit market — have been software and tech companies

Given the recent sell-off in software company stock, investors have become laser-focused on valuations of private credit loans.

Enterprise software companies have been a favored sector for private credit lenders since 2020. With many listed entities of asset managers that provided the loans due to report Q4 2025 earnings this week, all eyes will be on indications of how lenders now assess these borrowers.

Ultimately, software borrowers drove growth of the private credit market and the unitranche loan structure, which combined multiple tranches of debt into a single loan.

Indeed, many of the largest-ever unitranche loans — the favorite structure of the private credit market — have been software and tech companies.

Software and tech investments looked especially appealing during the Covid-19 pandemic, when remote working and schooling accelerated demand for software and tech.

Lenders liked the reliable revenue streams due to subscription-based, enterprise accounts. Software was also appealing due to the high switching costs of changing software providers, keeping customers coming back, or so the argument went.

Now, there are signs that the software business model is not as Teflon as once thought. AI is seen as a potential disruptor of software providers, giving people tools to create bespoke solutions and free up customers to end costly subscriptions.

But the reality is more nuanced. True, anecdotal evidence abounds that people are open to “cord-cutting” on software to save costs.

A spokesman for New York City parking garage company GMC explained that the company had recently ended a multi-year contract with a parking garage management software provider after it stopped providing certain features. Instead, GMC hired a programmer to develop a bespoke system that will organize the company’s New York City valet-parking garages more efficiently.

“Now we won’t be subject to another company’s price hikes. They have all the leverage if they know customers really rely on it,” the spokesman said.

But it certainly won’t work for all. A media company executive said there was “no chance” of canceling the content-management software system it used, adding that alarms about the death of software were overblown.

Broad brush for the sector
In a trend that has accelerated over the past two years, private credit issuers have refinanced debt in the syndicated loan market to capture lower borrowing costs. Now, these ex-private credit loans are selling off in the secondary leveraged loan market. Private credit loans generally don’t trade.

The secondary market performance of these recent private credit loan issuers is a proxy of market sentiment for the software sector.

For example, Kaseya’s first-lien term loan fell by around 3.5 points to around 96.75/97.75 today. In March 2025, the company refinanced private credit loans with a $3.175 billion S+325 first-lien term loan and a $925 million S+500 second-lien term loan. Kaseya, a portfolio company of Insight Partners, provides IT and security management software for managed service providers (MSPs) and mid-market enterprises (MME).

First-lien loans due September 2032 (S+400, 0% floor) to Finastra were marked at about 93/94.5 today, down from the high 90s two weeks ago. In July 2025, Finastra placed a $2.95 billion S+400 seven-year first-lien term loan and a $500 million eight-year S+700 second-lien term loan, alongside a €650 million E+450 first-lien term loan to refinance private debt. The London-based company, backed by Vista Equity Partners, is a global provider of software to financial services companies.

“It’s not just one thing,” said Howard Cohen, head of markets at Octaura. “Earnings matter and price movement matters. Concerns around AI capex are part of the conversation, but the sell-off was more about valuation and positioning than a single headline.”

Recent developments may actually help private credit lenders who provide loans to the software sector, according to Wells Fargo equity analyst Finian O’Shea.

“Public software credits trade wide in part by their more significant single-B share, but it’s still interesting to contrast to private markets where quality software credits are at least in-line,” O’Shea said in a research note published Feb. 2.

“This bodes really well for direct lending to the extent PE remains active in M&A and refis approach — especially where DL vehicles more clearly see opportunistic deal flow (Owl, Sixth Street, Golub). A pricing reset (upward, as it plays out) might drive mark-downs and lead to managers recognizing true strugglers. Jan & Feb NAVs for non-traded 3.0s will be telling data points. This [quarter], we think scripts will stick to: enterprise-grade, mission-critical, still reporting strong results, etc. etc.”

Even as investors pull back from sectors that may be prone to AI disruption, many say the picture is more nuanced than what the sharp drops in share prices are signaling.

“Credit investors should be most concerned about software companies with high technical debt, fragmented data silos preventing effective AI training, no clear path from copilot to agent, and business models vulnerable to incumbent platform vendors rolling out comparable AI features at lower incremental cost,” said PitchBook analyst Derek Hernandez.

“Software companies with these traits face existential margin compression and potential obsolescence as the market bifurcates between AI-native and AI-embedded category leaders and legacy laggards unable to transform their architectures fast enough,” Hernandez said.

“Evaluating these AI defensibility factors requires significant technical diligence that many credit investors may find challenging, but we believe it’s now essential for accurately assessing credit risk in the software sector.” (For more information and a deeper dive into the sector, see PitchBook’s recent report Clash of the Titans: Incumbents and Challengers in the Age of Agentic AI.)

This level of diligence will likely be near impossible for private credit borrower companies, which are generally private and don’t carry credit ratings. Meanwhile, investors will be reading the tea leaves for information, especially from private credit lenders and the private equity sponsors who own the companies.

Carefully watched are fair value marks on software and tech loans, and remarks about the software sector in BDC earnings calls. Ares Capital (Nasdaq: ARCC) will report Q4 2025 earnings on Feb. 4, for example.

Investors are also focused on responses from specialist investors in the sector.

“We do believe that AI will be transformational. We’re all in from an enterprise software standpoint,” said Orlando Bravo in an interview with Bloomberg Surveillance on Jan. 22 on the sidelines of the World Economic Forum in Davos, Switzerland.

“You see really important software companies being down 30% year/year. The free cash flow multiples have plummeted. That is a big problem of understanding what a software company does. AI will disrupt a percentage of software companies — less than half is what we think, but it will be disruptive to many of them, especially if your core competency is technical. AI can disrupt you. But what the market really, really needs to understand and get away from the generalities is an enterprise software company is about its domain expertise,” Bravo said.

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