A software company bought at a 13x EBITDA multiple can see its first-lien LTV jump from 45% to 73% and its equity value wiped out by 85% if its enterprise value multiple simply re-rates down to 8x. This looming valuation crisis threatens many LBOs financed at the market's peak.

To justify high valuations for SaaS companies, private equity sponsors would contribute larger-than-usual equity checks (e.g., 40% vs. a typical 20%). This gave lenders a false sense of security, persuading them to extend significant leverage on businesses whose enterprise values were already inflated.

PE firms that acquired SaaS companies at 10x+ revenue multiples are in trouble. With public comps trading at 4-6x and growth slowing, the equity portion of these leveraged deals is often underwater. There's no quick fix, forcing firms to grind out miserable returns over many years.

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.

Despite fears of AI disruption, private credit software loans have significant downside protection. With loan-to-value ratios around 30-40%, there is a substantial equity cushion. A company's value must erode by nearly 70% before the lender's principal is at risk, highlighting the structural safety of debt versus equity.

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.

An expert warns of a "mini bubble" where private credit funds lent heavily to PE firms buying unprofitable software companies based on high ARR multiples. With falling valuations, AI disruption, and a wall of debt maturing, a wave of defaults and restructurings is imminent.

Unlike public companies, highly leveraged SaaS firms bought by PE face a brutal reckoning. With no growth to pay down debt, they must slash headcount and R&D. This leads to a long, nasty grind of declining quality and market relevance, even if customer inertia keeps them alive for years.

Despite market fears about AI disrupting software companies, underlying private credit loans are structured defensively. They are often written at a 30% loan-to-value, meaning there is a 70% equity cushion before the lender's principal is at risk.