A large concentration of private credit lending is in the software sector, particularly SaaS businesses. The rise of powerful AI tools that can replicate software services cheaply poses a direct threat to the viability of these companies, creating a hidden risk concentration within private credit portfolios where there are few hard assets to recover.

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.

Private credit funds are exposed on two fronts: they are financing the massive debt rounds for AI infrastructure and also hold debt for traditional SaaS companies. As AI companies pitch a future where they render SaaS obsolete, it creates instability and default risk across these private credit portfolios.

Unlike the public equity markets, software exposure in credit markets is concentrated in private, not public, companies. An estimated 80% of these issuers are private, and 50% are rated B- or lower, creating a unique and more challenging risk profile due to lower credit quality and less transparency.

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.

During the 2021-22 peak, private credit firms abandoned profit-based underwriting for "Annual Recurring Revenue" (ARR) loans to software companies. They gambled these companies would become profitable. Many have not, creating a vintage of bad loans that now poses a significant risk to the lenders who changed traditional lending economics.

A significant portion of private credit portfolios consists of loans to software companies, which were underwritten based on predictable, recurring revenue. AI is now fundamentally disrupting these business models, threatening to devalue the very collateral that underpins billions of dollars in these 'safe' loans.

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.

A significant portion of private credit is concentrated in software companies. Many of these loans were made when rates were low, often with high leverage and weak terms. The emergent threat of AI-driven disruption to their business models now adds a new layer of fundamental risk to this already vulnerable cohort.