The most significant risk in software-focused private credit isn't established companies but those underwritten on Annual Recurring Revenue (ARR) multiples instead of cash flow. These high-growth, non-cash-flowing businesses may never reach profitability if disrupted by AI, creating a major potential vulnerability.

While over $40 billion in software loans are stressed, this reflects market perception of future AI disruption rather than current performance degradation. Key fundamentals like net retention and revenue growth remain relatively healthy. The real risk lies in a company's inability to adapt and its software's ease of replacement.

The market overestimates the immediate impact of AI on software companies, creating an opportunity in their debt. While the long-term threat is real (5-15 years out), most companies will have at least one chance to refinance their loans before facing an existential crisis from AI disruption.

While public software stocks have dropped 20-30% on fears of AI disruption, credit markets, particularly private credit, remain confident. Lenders are protected by low leverage multiples (1-6x EBITDA) and a substantial equity cushion, making them less sensitive to equity valuation shifts.

The primary AI threat to enterprise software isn't solo developers creating clones. It's established platforms like Rippling rapidly expanding into adjacent markets and, more importantly, enterprise customers shifting to shorter one-year contracts due to uncertainty about their future needs.

The narrative that AI will immediately and negatively disrupt all software companies is flawed. Significant infrastructure capex is required before widespread adoption, delaying the impact. Furthermore, many well-positioned incumbent software companies will actually benefit from AI, using it to expand their margins.

Permira's credit team applies a downside-protection lens to AI, asking if a technology makes a business more resilient or obsolete, rather than trying to identify the next major disruptive force.

When evaluating software loans, Blackstone moves beyond financials to product underwriting. Its investment committee uses a specific scorecard to assess a company's risk of AI disruption, how embedded its product is in workflows, and how its technology stacks up, demonstrating a structured approach to modern threats.

The recent software stock sell-off is rooted in investors' inability to confidently price long-term growth (terminal value). While near-term earnings might be strong, the uncertainty of future business models due to AI is causing a fundamental reassessment of what these companies are worth.