Software's Share of Direct Lending Collapses to 12% of Deals as Incumbent Lenders Retreat to Amend-and-Extend
The software underwriting retreat that began with AI-disruption fears is now visible in hard share data — and the marginal buyer of software risk has largely left the market.
The numbers (Morningstar/PitchBook, Oct 9): "Software companies have accounted for 12% of all PE-backed direct lending deals by count tracked by LCD so far in 2026, down from 16% last year. The decline in PE-backed software direct lending deals by volume is much steeper... software deals accounted for 15% of PE-backed direct lending volume so far this year, down from 22% last year and the recent peak of 27% in 2020 and 2022.1" The market structure changed too: "Market sources say private credit software deals done this year have typically been refinancings and extensions completed by incumbent lenders. They say it's tough to attract new lenders to legacy software credits."
The trigger, named: "AI-induced worries about software drove a profound change for private credit in the first quarter, when the launch of Anthropic's Claude Cowork ignited investor fears that new AI tools would spur the creation of bespoke software solutions and end the costly subscriptions that had driven revenue for software-as-a-service companies."
What still gets financed — and at what price: Brookfield's carveout of compliance-software firm Actimize from NICE has ~$800M of private credit lined up (niche seen as "more resilient to AI disruption"). Comvest provided a $350M refinancing of Calero at S+650, taking out incumbents MidCap and Golub — "pricing... was compelling enough to make some lenders comfortable with the risk." The outlier: $600M+ for Permira's Highspot/Seismic merger at S+475 with initial annual-recurring-revenue covenants converting to cash-flow covenants — "a feature that is more of a hallmark of the days of easy credit" — in a club of banks and direct lenders led by PNC.
The amend-and-extend wall: Sophos (Thoma Bravo) "last week completed a cross-border A&E, pushing out the maturities on first-lien loans totaling $1.66 billion and €450 million. This came after the company held talks earlier this year for a potential private credit refinancing of its debt that fell through." Proofpoint extended $4.3B of first-lien debt in July; Imprivata pushed out ~$1.2B earlier in the summer. "Billions in software loans held in BDCs are set to mature in 2027 and 2028."
What it means: The 9fin Q2 BDC watchlist (via Private Credit Daily) shows information technology at "just under 36 per cent of $4.19bn in marked-down fair value" across 118 credits flagged for ≥5-point markdowns, "with more than half the flagged credits maturing by 2029" — so the marks are arriving ahead of the refinancing events that will settle them. The pricing dispersion is the story for underwriters: S+475 with ARR covenants for a defensible merger vs. S+650 for a takeout refinancing is a 175bp AI-risk premium inside one sector. Legacy SaaS credits that can't reprice are being pushed out via A&E rather than resolved — deferring the day of reckoning toward the 2027–2028 BDC maturity wall (see Distressed Exchange Cohorts Face Hard Default Cliff as Private Credit Defaults Hit 5.8% and Apollo's Zito: "I Literally Think All the Marks Are Wrong" — Managers Concede the Valuation Problem as Proof Arrives From Banks, Short Sellers and Data Vendors).
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An instance of Software subscription metrics cannot secure private credit once generative AI disintermediates SaaS. — Lenders are fleeing software collateral because AI-driven disintermediation destroyed the subscription-revenue case their underwriting was priced on. ↩︎