From Goldman Sachs to Blackstone, Wall Street giants are backing it: Software won't collapse.

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In response to the recent sharp sell-off in the software sector triggered by the “AI threat” narrative, top executives at major Wall Street financial institutions are trying to send a clear signal to investors: Rumors of the demise of software companies have been greatly exaggerated.

Last week, following news that AI startup Anthropic launched new tools, shares of software giants like Salesforce and Adobe plunged, wiping out hundreds of billions in market value. Panic spread through the market as investors worried that AI would replace traditional software functions and destroy the business model of the industry.

In response, executives from Goldman Sachs, Blackstone, Apollo Global Management, and KKR made intensive statements this week. They noted that the current market reaction is an “indiscriminate” sell-off. While AI will indeed bring disruption, the view that all software companies will become obsolete is too broad and lacks basis.

While calming market sentiment, these Wall Street giants also downplayed their own risk exposure in the software sector. They emphasized that although the software industry has always been a hot target for private equity investment, their diversified portfolios are sufficient to withstand fluctuations in any single industry, and some institutions have already adjusted their holdings in advance.

“Intense Technology Cycle” and Pricing Power Questions

Despite the overall reassuring tone, investors did not deny the transformation facing the industry. John Zito, Co-President of Apollo Asset Management, said frankly in a CNBC interview on Wednesday that while the software industry won’t disappear, the business logic will change.

“No one at Apollo thinks software will disappear. In fact, we actually believe software usage will greatly increase,” Zito said. “The only question is—how much are you going to pay for it?”

Zito warned that the market is headed for a “very intense technology cycle” and there will be both winners and losers. He especially cautioned investors not to judge the prospects of software companies solely based on current revenue performance, as they still appear healthy for now. He offered a vivid analogy: “It’s like saying, when the first iPhone came out, that BlackBerry would still do just fine.”

Root Causes of Panic: AI’s Impact on the Subscription Model

This bout of market panic was triggered directly by Anthropic’s announcement of its new legal tools for its Cowork assistant, designed to aid in drafting and research tasks. This news sparked worries among investors about the fate of software providers, causing Salesforce and Adobe stock prices to plummet last week and continue declining through Wednesday.

Even before Anthropic’s announcement, investors were already uneasy about the hundreds of billions pouring into the AI sector and the potential for upending existing industries. Software companies are seen as particularly vulnerable, since they generally profit by charging subscription and licensing fees.

For years, software businesses have been regarded as premium assets by private equity firms and lenders, thanks to their high profit margins and stable recurring revenues. If these software companies continue to see their valuations plummet, these investment institutions could face huge losses.

Discrimination: Opportunity Amid “Indiscriminate” Sell-off

Confronted with the industry-wide downturn, Michael Chae, Blackstone’s Chief Financial Officer, believes the market response lacks rationality. At a Bank of America conference on Tuesday, he stated that although recent trades in the sector have been “indiscriminate,” differentiation will emerge over time.

“We anticipate that larger, well-established companies will be better protected and, in many cases, become beneficiaries of AI,” Chae said. He stressed that the market should not indiscriminately short all software assets.

Goldman Sachs CEO David Solomon expressed a similar view at the UBS conference on Tuesday. He acknowledged that his company expects AI to disrupt the market, but believes “the narrative over the past week has been a bit too broad.”

Giants’ Self-Defense: “Negligible” Risk Exposure

While advocating for the industry, major institutions are also assuring investors of their own safety.

KKR CFO Robert Lewin said at the UBS conference earlier this week that the investment diversity of large asset managers will help shield them from the impact of AI disruption. He revealed that about 15% of KKR’s private equity exposure is to software companies, making up roughly 7% of total assets.

Lewin also noted that the company recognizes the risks brought by AI applications and has sold off some businesses in recent years.

Goldman Sachs’s David Solomon downplayed the risks even further, stating that Goldman’s software investment exposure, “relative to the overall platform size, is negligible.”

Risk Warning and DisclaimerThe market entails risks and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, perspectives or conclusions here are appropriate to their unique circumstances. If you invest accordingly, you do so at your own risk. ```