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

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. 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. The exposure, however, runs deeper. Software has been PE's "go-to investment of the past decade." 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.

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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.

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.

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