Private equity giant Apollo warns: "Software is dead"! AI is reshaping the $440 billion valuation logic.
John Zito of Apollo recently sparked shock at an investor gathering in Toronto, with his provocative question—“Is software dead?”—signaling a complete rupture in private capital markets with the long-standing core assumption that the software industry offers “stable growth and solid income.” The rise of artificial intelligence is forcing investors to reassess this once highly sought-after sector.
This warning is not unfounded. According to sources cited by Bloomberg, Apollo has nearly halved its software risk exposure in its direct lending fund for 2025, slashing it from about 20% at the start of the year. Meanwhile, institutions such as Arcmont Asset Management and Hayfin Capital Management have hired consultants specifically to scrutinize companies in their portfolios that may be made vulnerable by AI technology.
Market panic is beginning to spread. Due to concerns over AI investments not delivering the expected returns, Microsoft’s share price has fallen; a technology fund under Blue Owl Capital has seen massive outflows; and two European software companies have been forced to shelve loan deals. The traditional Software-as-a-Service (SaaS) model is now facing a severe blow from AI-native companies and “ambient coding” startups, threatening its previously strong moat.
This upheaval has directly impacted the $440 billion bet private equity has placed on the sector over the past decade. According to Bloomberg data, between 2015 and 2025, private buyers spent over $440 billion to acquire more than 1,900 software companies. Now, with rising borrowing costs and accelerated technological change, investors and lenders are fundamentally questioning the sustainability and valuation logic of these assets.
Valuation Collapse and SaaS Crisis
For a long time, software deals were easily approved by investment committees due to their “sticky” revenues and subscription models. However, this logic is being rewritten by AI. Isaac Kim, a partner at venture capital firm Lightspeed and former head of private technology investing at Elliott Investment Management, said bluntly, “Technology private equity in its current form is dead.” He noted that AI has altered the basic assumption that the underlying product can remain relevant long enough for financial engineering to work.
The SaaS model is taking the brunt. Tools like Claude Code from Anthropic enable users with no programming experience to build software, drastically lowering technical barriers and eroding the rigid, “one-size-fits-all” advantage of traditional SaaS products.
This shock is already showing up in valuations. According to Pitchbook, in 2025 the average buyout multiple for SaaS companies in private equity deals has dropped from 24 times the prior year to 18 times, compared to previous star deals such as Coupa Software and Cloudera, which once reached multiples of 60. Park Square founder Robin Doumar commented that the software industry’s “invulnerability halo” is outdated, and hopes that the era of financially illogical high multiples is coming to a close.
Credit Market Strains and Default Risks
For lenders in the software sector, risk is becoming actualized as losses. In 2025, as scrutiny of AI’s impact intensifies, outsourcing firms KronosNet and Foundever have struggled, and their debt is now marked as distressed. Bonds of other software companies, including McAfee and ION Platform Investment Group, have also plunged. The credit arm of CVC Capital Partners was even forced to take over call center support firm Sabio Group after its previous owner failed to find a buyer.
Blackstone President Jon Gray warned that the greatest risk is “disruption,” akin to what yellow pages faced with the advent of the internet in the 1990s. Given software’s asset-light model, lacking physical assets as collateral, lenders risk larger principal losses if a company collapses.
Major investment banks have issued warnings:
- UBS: In a scenario of “aggressive AI disruption,” private credit default rates could rise to 12%-13%.
- Citigroup: Recommends an underweight position in software loans, seeing limited appeal outside of CLO investors.
- Morgan Stanley: Advises shorting total return swaps on loans due to high software exposure.
- Barclays: Points out the loan-to-value ratio for software BDCs (Business Development Companies) may increase, with looming asset quality risks.
Hidden Exposure and Market Overreaction?
It’s worth noting that the actual private credit exposure to software may be much higher than headline figures suggest. Raymond James analyst Robert Dodd pointed out that if a software company serves the healthcare sector, funds often categorize it as healthcare exposure, which means the real risk may be underestimated.
While market sentiment remains pessimistic and the S&P North American Software Index dropped 15% in January, marking its steepest monthly fall since 2008, not everyone is bearish. Some cases previously seen as risky are seeking new vitality through transformation. For instance, Zendesk made no mention of AI risk when acquired in 2022 but quickly integrated the technology; now its internal AI products generate more than $200 million in annual recurring revenue.
Brian Ruder, Co-CEO of Permira, believes some of the current concerns are somewhat excessive. He stated, “Looking back at historical technology platform shifts, there will be both winners and losers among AI-native firms and existing SaaS giants.” However, for lenders, the top priority now is to ask software executives at lending meetings: How will you respond to the challenges of new AI technology?
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