Private equity firm Apollo is outperforming peers by having intentionally avoided software investments over the past decade. While others chased soaring SaaS valuations, Apollo's skepticism about the sector's durability, now threatened by AI, has positioned it to benefit as investors flee software-heavy funds.
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Private equity firms, which heavily invested in software companies for their stable earnings, are now in a bind. The AI threat devalues these assets and complicates exits, forcing them away from traditional IPOs and toward more complex M&A strategies.
The "SaaS-pocalypse" isn't about AI replacing software overnight. Instead, AI's disruptive potential erases the decades-long growth certainty that justified high SaaS valuations. Investors are punishing this newfound unpredictability of future cash flows, regardless of current performance.
As AI commoditizes software, the most defensible businesses are no longer asset-light SaaS models. Instead, companies with physical world operations, regulatory moats, and liability are safer investments. Their operational complexity, once a weakness, now serves as a formidable barrier against pure AI-driven disruption.
For over a decade, SaaS products remained relatively unchanged, allowing PE firms to acquire them and profit from high NRR. AI destroys this model. The rate of product change is now unprecedented, meaning products can't be static, introducing a technology risk that PE models are not built for.
Private equity giant Apollo is posting record returns by intentionally sidestepping the software industry. While peers loaded up on SaaS at soaring valuations, Apollo's contrarian bet against the sector is paying off as AI disrupts traditional software business models and threatens incumbent players.
Private credit funds have taken massive market share by heavily lending to SaaS companies. This concentration, often 30-40% of public BDC portfolios, now poses a significant, underappreciated risk as AI threatens to disintermediate the cash flows of these legacy software businesses.
The recent $300B SaaS stock sell-off wasn't driven by current performance. Investors are repricing stocks based on deep uncertainty about whether legacy software companies or AI-native firms will capture the value of automating human labor in the next 3-5 years.
For years, founders of profitable but slow-growing SaaS companies could rely on a private equity acquisition as a viable exit. That safety net is gone. PE firms are now just as wary of AI disruption and growth decay as VCs, leaving many 'pretty good' SaaS companies with no buyers.
The real SaaSpocalypse may ignite when AI labs like OpenAI or Anthropic go public. This will provide a clear alternative for investors to rotate capital directly out of legacy software stocks—which are threatened by AI—and into the very companies causing the disruption, creating a massive liquidity drain.
For private market giants, the key differentiator isn't assets under management, but the ability to create proprietary investment opportunities. Apollo has built 16 internal "origination engines" in niche areas like fleet and consumer finance to generate unique alpha for its clients.
