Huge private equity software bets most at risk as investors face returns squeeze, Apollo says

Apollo Global Management's senior executives have delivered an unusually candid assessment of private equity's overexposure to software, challenging one of the sector's core investment theses. In remarks first disclosed in June 2026, John Zito framed artificial intelligence disruption as the paramount risk facing private capital markets—surpassing traditional concerns about tariffs, inflation, and sustained interest-rate elevation. His provocative question—"is software dead?"—catalyzed broader institutional reckoning with the assumption that software businesses, built on recurring-revenue models and sticky customer bases, represented defensive, stable holdings.

The AI revolution has fundamentally altered competitive dynamics in software markets. AI-native firms can develop and deploy solutions faster and at lower cost than traditional vendors, enabling displacement of entrenched players. Software-as-a-service companies face particular pressure, as platforms like Anthropic's Claude Code democratize software development by allowing non-technical users to create custom applications without coding expertise. This technological shift threatens business models that once operated in defensible competitive moats. For years, private equity deployed hundreds of billions of dollars into software acquisitions, predicated on growth stability and revenue resilience. That assumption is now being tested.

Apollo's portfolio actions underscore the magnitude of the reassessment. The firm reduced software exposure in its direct lending funds by nearly 50% during 2025, contracting from approximately 20% allocation at the year's beginning. This rebalancing reflects institutional conviction that current valuations embed growth assumptions no longer supportable in an AI-disrupted environment. Other credit managers, including Arcmont Asset Management and Hayfin Capital Management, have engaged external consultants to stress-test portfolio companies for vulnerability to technology obsolescence and competitive displacement.

The valuation reset is creating measurable losses in public and private markets. An S&P index tracking listed buyout firms has declined roughly 8% since January 2026, reflecting deterioration concentrated in software holdings. More critically, Apollo and other lenders warn that private equity firms have systematically overstated software asset values, creating latent losses for credit investors holding leveraged positions in smaller software companies. Companies including Internet Brands, SonicWall, and Perforce exemplify the exposure; Apollo itself took defensive positions by shorting the corporate debt of these and similar firms. Recent market signals—including Microsoft's stock decline on AI monetization concerns and Blue Owl Capital's disclosure of significant outflows from a tech-focused fund—confirm that software revaluation is spreading across institutional portfolios.

The convergence of higher interest rates, AI disruption, and correcting valuations is creating a "Darwinian moment" for software companies in private equity portfolios, particularly those carrying private-credit leverage. Smaller, niche software companies acquired at elevated multiples face the most acute risk of covenant pressure, refinancing challenges, and potential restructuring. This dynamic has prompted lenders to demand greater discipline in underwriting assumptions and valuation methodology going forward.