Private credit investors are sorting software companies into winners and losers after early-year AI panic subsided, with managers now betting that some firms will strengthen as they integrate new AI capabilities while others face obsolescence. The rapid market swing - from a sell-off that crushed valuations to a partial rebound - has forced a more nuanced playbook.
Software stocks tumbled in February when Anthropic's new tools raised fears that AI could displace large swaths of the sector. The shock hit US-listed private credit vehicles with heavy software weightings. By June, however, a rebound was underway. Snowflake, whose shares had fallen more than 50% from year-earlier levels, recovered much of that ground after announcing stepped-up AI investment that investors now believe will drive demand.
"There was a bit of panic early on, but you've seen a big rebound," said Anant Kumar, global investment strategist at Benefit Street Partners. "Software sold off massively in quarter one, but if you look at say the IGV ETF, it has recovered a lot of its losses."
Not all software is doomed
Kumar said the reality is more complicated than the panic suggested. Parts of the software market are "truly doomed," he believes, while others face disruption that is manageable and some may even gain from AI. That differentiation, he noted, hasn't been fully priced in.
Jakob Schramm, head of private credit at Golding Capital Partners, takes a similar view. "AI is also a chance for a lot of software companies," he said. Rather than simply displacing existing models, the technology can enhance them. Golding keeps software exposure at roughly 10 to 15 per cent, focused on lower mid-market and mid-market firms - areas he said are less likely to undergo wild swings in sentiment. He described the most durable businesses as those that are vertically integrated, rich in proprietary data, and deeply embedded in customer systems.
Selective bets on SaaS continue
At Partners for Growth, a $1bn firm, software exposure also sits around 15 per cent. Jason Georgatos, the president, said the firm remains active but choosy. "We are still investing in SaaS companies despite the potential for disruption, we think there is still a lot of good reasons to back certain SaaS companies," he said. Portfolio construction, he added, is a "constant debate," with capital tilting toward regulated and defensive segments like healthcare and financial services where the cost of switching is high.
Georgatos warned that more commoditised SaaS products and dashboard-style tools look vulnerable to AI substitution. For managers, the skill of distinguishing durable software investments from those at risk of being automated away is growing urgent. Developing that sharp-edged assessment ability correlates with broader AI strategy education, such as AI for Management.
IT and communications face the most immediate threat
Solomon Nevins, partner at The Fund Review, said private credit's overall exposure to software is unlikely to prove "terminal" for the asset class, but how managers respond to disruption matters. His firm's data shows IT and communications services, which account for 22 per cent of semi-liquid private credit funds on average, are the areas most vulnerable to AI-driven change. Nevins has observed a gradual reduction in IT weighting across portfolios, along with some reclassification of holdings, as lenders reposition ahead of further disruption.
Why this matters for management
For managers overseeing capital allocation, technology investments, or corporate strategy, the software reset underscores a critical need: separating signal from noise in AI disruption. Blanket sell-offs and hype cycles miss the nuance that some companies will be strengthened by AI. The ability to identify businesses with deep data moats, vertical integration, and high customer switching costs - while avoiding those that offer only easily replicable dashboards - has become a strategic differentiator. Resources that build this capability, like AI for Executives & Strategy, are increasingly relevant as the technology reshapes competitive dynamics sector by sector.
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