AI anxiety sweeps Wall Street, global private equity tech M&A volume plunges 70%

Due to the disruptive impact of artificial intelligence, global private equity technology M&A transaction volume shrank sharply in the first quarter this year, valuations of software assets came under pressure, and industry exit difficulties continued to intensify.

According to Bloomberg, Bain & Company's latest report shows that global technology M&A transaction volume in the first quarter declined 70% year-on-year to $20 billion, mainly dragged down by a significant reduction in large-scale deals. During the same period, valuations of software companies fell about 8%, while the average valuation decline for other industries was only 0.3%.

Rebecca Burack, Global Head of Private Equity at Bain, stated that after digesting the impact of Trump tariffs at the start of the year, the industry was subsequently hit by multiple pressures including the “SaaS Apocalypse” (collapse in software-as-a-service investments), concerns over private credit markets, and the Iranian situation pushing up oil prices.

No structural damage in the market, confidence is the main issue

Burack emphasized that the current market has not seen structural damage. The economy continues to expand, the stock market performs steadily, debt financing channels are unobstructed, and private equity institutions have ample dry powder. “We don’t have a capital problem, it’s more a confidence issue.” she said.

Bain’s report pointed out that institutions must face up to the threats brought by AI, studying both how to protect their current portfolios and incorporating AI factors into new investment evaluations.

Burack said that investors need a clearer judgment of the macro environment to advance deals. “You can complete quality transactions and generate substantial returns under various economic scenarios, but the premise is that you must be clear on which scenario you’re operating in, and know what game you’re playing.”

Exit difficulties persist, assets "trapped" in portfolios

The private equity industry has made little progress clearing backlog exit assets. The report shows that the industry’s distribution ratio (based on NAV) remains at historic lows, and more and more companies are ‘effectively trapped in their portfolios’.

Asset holding periods have extended from the previous three to four years to six to seven years. Burack pointed out that historically, the industry needed to achieve annual profit growth of about 5% during holding periods in order to reach a 2.5x return target; today, this threshold has risen to around 12%.

High-quality assets can still find buyers, but old assets with uncertain prospects and high valuations remain hard to offload. Even the increasingly popular “continuation funds” (transferring assets from old funds to new fund structures) face ever stricter scrutiny from limited partners (LPs). Currently, most assets in M&A investment portfolios were acquired in 2021 or earlier.

AI disrupts software business models, PE accelerates retreat from tech assets

The disruptive threat of AI to the software industry has become the core driving force behind the cooling of private equity tech deals in this cycle. Private equity institutions were already under continuous pressure to exit assets and return capital, and AI’s potential impact on software company business models is further intensifying this predicament.

In the first quarter this year, software company valuations declined about 8% quarter-on-quarter, far exceeding the average level for other industries, reflecting deep market concerns over AI reshaping the competitive landscape of the software sector. The Bain report, quoting MSCI data, shows that institutional investors have significantly trimmed their software holdings, actively reducing their exposure to such assets.

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