Asset Quality: The Software Reset, PE's Favorite Sector Under Pressure

Section I: Challenges for LPs · from The State of Private Equity, Part 2B: Challenges and Opportunities for LPs.

Software's decade-long run as PE's favorite sector is facing its first real test.

Bids on software-backed leveraged loans fell off a cliff in early 2026, triggered by fears about AI and its impact on subscription-based software businesses.¹⁵ So far, the decline looks more like a perceived risk than a wave of actual credit deterioration, and many software borrowers continue to generate stable, recurring cash flows.¹⁵ The exposure, however, runs deeper. Software has been PE's "go-to investment of the past decade."¹⁵ It's also the largest sector by BDC debt exposure at roughly 20%, meaning LPs carry software risk through both the equity and credit sleeves of their portfolios.¹⁵

Chart in the full report — source: PitchBook¹⁵

PitchBook's take-private quant screen of the public markets showed that 27 of the top 30, and 38 of the top 50, LBO candidates by fundamental metrics are now software companies.¹⁵

Whether this represents a buying opportunity or a structural de-rating of PE's darling sector remains an open question. That repricing does highlight a broader rotation: capital is shifting away from software and toward hard assets with an AI tailwind, or assets without AI risk, a trend we'll explore further in Section II's infrastructure opportunity.

Chart in the full report — source: PitchBook¹⁵