The market's liquidity crisis is driven by a fundamental disagreement. Limited Partners (LPs) suspect that long-held assets are overvalued, while General Partners (GPs) refuse to sell at a discount, fearing it will damage their track record (IRR/MOIC) and future fundraising ability. This creates a deadlock.

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.

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.

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.

PE firms are struggling to sell assets acquired in 2020-21, causing distributions to plummet from 30% to 10% annually. This cash crunch prevents investors from re-upping into new funds, shrinking the pool of capital and further depressing the PE-to-PE exit market, trapping investor money.

A significant, under-the-radar headwind for tech M&A is the instability in the private credit market. Private equity firms, which rely on borrowing to finance large software acquisitions, face higher loan costs and investor uncertainty about the long-term value of software companies. This financial friction is stalling deals that would otherwise happen.

The traditional software buyout playbook relies on a stable terminal value multiple for exits. However, AI's ability to make existing code obsolete means long-term free cash flow projections are no longer reliable, rendering the leverage-based PE model fundamentally flawed.

Howard Marks highlights a critical issue in private equity: a massive overhang of portfolio companies needing to be sold to return capital. Higher interest rates have made exits difficult, creating a liquidity bottleneck that slows distributions to LPs and commitments to new funds.

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.