New "Subprime Crisis"? U.S. PE's "software industry loan exposure" is larger than reported in financial statements

The actual loan exposure of the U.S. private credit industry to the software sector may far exceed its disclosed levels.

On February 13, Bloomberg reviewed thousands of holdings from seven major Business Development Companies (BDCs) and found that at least 250 investments worth more than $9 billion were not labeled as software loans by lenders, even though the borrowing companies were clearly defined as software firms by other lenders, private equity sponsors, or the companies themselves.

This difference in classification not only makes it difficult for outsiders to accurately measure the concentration of credit funds in the software industry, but also leads to an underestimation of market vulnerabilities as AI disrupts traditional software business models. Market observers noted that while such discrepancies may not be intentional concealment, they do expose long-standing issues such as inconsistent reporting standards in the private credit industry, complex fee structures, and excessive discretion in asset valuation.

Raymond James Financial Inc. analyst Robert Dodd warned that the current classification usually only covers general software, severely underestimating exposure to "software as a business model." This traditional classification is already obsolete in the age of AI.

At present, software loans have become the single largest sectoral exposure among BDCs. According to Barclays Plc, software loans account for about 20% of all BDC-held loans, far higher than the 13% share in the U.S. leveraged loan market. Amid the recent plunge in software stocks and the emergence of AI startups like Anthropic PBC launching new tools that threaten traditional software services, this huge and opaque risk exposure has raised investor concerns over a possible "new subprime crisis."

Invisible Exposure: Redefining “Software Companies”

Bloomberg News reviewed BDC disclosures managed by Sixth Street, Apollo Global Management Inc., Ares Management Corp., Blackstone, Blue Owl Capital Inc., Golub Capital, and HPS Investment Partners, and found that all these institutions have instances of software companies being classified under other industry categories.

Take Pricefx for example. The company prominently markets itself as the “number one leading pricing software" on its website, yet one of its main lenders, Sixth Street Partners, classifies it as a "business services" company instead of software.

Sixth Street states in its filings that it groups investments by end market, so software does not appear as a separate category, although it acknowledges that many portfolio companies mainly offer software products or services—exposing it to downside risk from that sector.

Additionally, Apollo classifies Kaseya, which calls itself an “IT management software” company, as “specialty retail,” whereas Blackstone and Golub label it under software.

Even more, Golub labels Restaurant365, which identifies as a “back office restaurant system software” provider, as “food products,” grouping it with Louisiana fish fry and Bazooka gum makers; while Ares categorizes it under software and services holdings.

Barclays strategist Corry Short pointed out that this inconsistency makes it exceptionally difficult to compare software exposures across the entire market.

Confusion in Classification Standards Increases Risk Assessment Difficulty

According to Bloomberg, such classification confusion even exists within the same company.

The largest public BDC under Blue Owl—Blue Owl Capital Corp.—classifies at least four companies as “chemicals,” “infrastructure and environmental services,” and “business services;" however, in its tech-focused fund Blue Owl Technology Finance Corp., these four companies are clearly labeled as “software.”

A Blue Owl spokesperson responded that each fund has different investment strategies, so industry classifications may vary. Their goal is to provide information in a consistent manner so investors can understand the risks.

Because private credit loans are usually privately negotiated and thinly traded, lacking independent price discovery or universal benchmarks, the labels assigned to assets by fund managers become unusually important.

Michael Anderson, Global Head of Credit Strategy at Citi, noted that this increases the responsibility for BDC managers to correctly assess, value, and classify these assets, since the loans are not publicly traded and not included in widely-tracked indexes that investors can independently review.

Concerns About Sector Concentration Amid AI Disruption

Over the past decade, alternative asset managers flocked to the software sector, attracted by its predictable revenue streams.

Earlier this month, Apollo President Jim Zelter disclosed that about 30% of private equity capital flowed into the sector during this period, and software accounts for about 40% of all sponsor-backed private credit.

However, as AI technology sees breakthrough advances—especially with new tools from Anthropic PBC beginning to threaten everything from financial research to real estate services—market anxiety over the future of the software business is escalating rapidly.

The S&P North American Software Index has fallen over 20% so far this year, with several single-day drops exceeding 4% in recent weeks. Analysts believe that as AI reshapes the software industry, private credit managers will face increasingly robust scrutiny.

Raymond James' Dodd pointed out that different BDC reporting practices for the same loan create problems; such inconsistency obscures the truth. The AI revolution is thoroughly upending software and its commercial functions, making historic industry classification guides obsolete.

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