Reports say software stocks face huge exposure, with US PE firms experiencing a new round of sell-offs.

AI’s disruption panic in the traditional software business model is spreading from the stock market to the opaque private equity market. On February 3rd local time, as Goldman Sachs and Barclays consecutively released reports revealing huge risks in the software industry, publicly-listed private equity (PE) and business development companies (BDC) in the US experienced a new wave of sell-offs. Investors are concerned that the hundreds of billions of dollars of private software debt these institutions hold may be facing severe valuation risk. The market reacted early on Monday, with Blue Owl Capital’s stock price falling around 5%, and industry leaders such as Ares Capital, Sixth Street Specialty Lending, and Trinity Capital all dropping more than 3%. Capital Flight: Selling Software, Embracing Chips The trigger for this round of sell-off was a capital flow report from Goldman Sachs Prime Brokerage. The report shows that hedge funds are rotating industries at record speeds: frantically selling software stocks while buying semiconductor stocks heavily. Goldman Sachs pointed out in the report: “Last Thursday’s net selloff in the technology sector hit the highest level since September 2024, with all sub-sectors seeing net selling, led by software. On the other hand, the semiconductors and equipment sector is the top net buying sub-industry this week... its net exposure at the end of this week reached a historic high of 8.7%.” This extreme sentiment is being passed down the chain. According to Bloomberg, an index tracking software stocks plunged 15% in January, marking the largest monthly drop since October 2008. This panic directly hit private credit institutions that finance software companies. Unlike last November’s widespread concerns about subprime risk, today’s selling reflects deep anxiety over the “software industry being overwhelmed by AI.” Last week, prices for syndicated software loans in the broad loan market dropped about 4 points. Barclays: 20% “Invisible” Risk Exposure The market’s biggest worry is that the massive software debt held in BDC portfolios could be at risk of a total wipeout in value. Barclays analyst Peter Troisi pointed out in his latest report: “Software is the biggest industry exposure for BDCs, accounting for about 20% of the investment portfolio, which makes the sector very sensitive to the recent declines in software equity and credit valuations.” According to PitchBook data, as of Q3 last year, the total exposure was about $100 billion. If you include Business products and services, related exposure even rises to 30%. Barclays warned that while publicly traded software stocks have already dropped 15% this year, BDCs mainly hold privately-negotiated credit loans that aren’t traded on public exchanges. This means the collapse in public markets doesn’t immediately show up in the BDCs’ net asset value (NAV). “Most BDCs won’t release Q4 earnings until late February or March. Even then, fair value marks as of December 31st, 2025, will not reflect the recent dramatic slide in valuations.” This “lag” in valuations makes investors even more panicked—as it’s a bottomless black hole. UBS Warning: Default Rates Could Soar to 13% If AI does indeed lead to the large-scale elimination of traditional software companies, the consequences will be catastrophic. UBS strategists gave a shocking forecast in a report on Monday: if artificial intelligence triggers “aggressive” disruption among corporate borrowers, the US private credit default rate could soar as high as 13%. This view isn’t without basis. As early as the end of 2025, PE giant Apollo Global Management had already started taking action. According to previous reports in the Financial Times, Apollo CEO Marc Rowan explicitly stated that the company would cut its credit fund's software exposure from 20% to below 10%. Apollo even shorted bonds from multiple software companies, including Internet Brands under KKR. Rowan bluntly said at the time: “I don’t know if the enterprise software industry will benefit or be destroyed by this. But as a lender, I’m not sure I want to be in there to find out.” Market Views: Overreaction or Prelude to Crisis? Despite the spread of panic, some analysts believe the market may be overreacting. Oppenheimer’s senior BDC analyst Mitchel Penn said, apart from speculation and emotional venting, there’s no new fundamental information explaining the drop: “Usually on days like these, we tell clients to buy because there’s no new information to make you understand why it’s falling.” Yet, a series of negative headlines have investors on edge. Just last week, a Blue Owl technology fund had to relax withdrawal restrictions due to surging redemption requests, resulting in about 15.4% of net assets flowing out. Meanwhile, BlackRock’s private debt fund TCP Capital Corp. saw its stock price hit the biggest drop in nearly six years after disclosing a series of investment write-downs. Before earnings season reveals the real value of these “black box” assets, the market seems to have decided to sell first and ask questions later. Risk Warning and Disclaimer The market carries risk; investments should be made with caution. This article does not constitute personal investment advice and does not take into account the special investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions herein fit their specific circumstances. Invest at your own risk.