The AI revolution is a double-edged sword for software. While some firms will boost margins using AI for development, many others, particularly smaller, leveraged companies, face existential disruption. This creates significant shorting opportunities for investors who look beyond current earnings to future terminal value.

Software, once a defensive haven for credit investors, faces a major threat from AI. AI's ability to standardize data and workflows could disrupt legacy SaaS companies, making the 30% of direct lending portfolios concentrated in software a significant, overlooked risk.

The primary threat of AI to software isn't rendering it obsolete, but rather challenging its growth model. AI will make it harder for SaaS companies to implement annual price increases and will compress valuation multiples, creating stress for over-leveraged firms from the zero-interest-rate era.

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.

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 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.

The concentration of software loan maturities in 2028 is not an impending cliff but a timeline for a market shakeout. Over the next few years, AI's impact will differentiate companies with durable business models that can refinance from those that are existentially threatened and will likely default.

The rise of powerful AI tools threatens the business models of many software-as-a-service (SaaS) companies. This jeopardizes their future revenue, making it difficult to refinance loans originated at near-zero interest rates. This is a fundamental, technology-driven risk to a large segment of private credit.

Recent financial distress in large, private equity-owned software companies is being misattributed to the threat of AI. The actual cause is over-leveraging when interest rates were low, followed by an inability to service that debt as rates rose and growth slowed. It's a credit problem, not a technology disruption problem.