Key Takeaways
- • Hg Capital marks down software holdings amid a sector-wide selloff that has wiped nearly $1 trillion from software and services stocks, driven by investor concerns over AI disruption to enterprise software business models.
- • Software valuations in freefall: The S&P 500 software and services index posted its worst three-month performance since May 2002, with the sector down approximately 25% from its October 2025 peak while the broader S&P 500 remains up 1%.
- • M&A and IPO activity stalling: A broad software stock selloff is disrupting deal-making and initial public offerings as volatile valuations make pricing unreliable and potential buyers fear overpaying for assets subject to further markdowns.
- • AI existential uncertainty driving repricing: Dealmakers report investors are "trading on fear" regarding artificial intelligence's potential to reshape software business models and render certain digital services obsolete, creating a "Darwinian moment" across the sector.
- • Sellers trapped at trough levels: Private equity firms and other asset holders face a dilemma—valuations are unreliably low, making transaction timing difficult as some investors lack the financial capacity to absorb losses from selling on the downside.
Summary
Hg Capital, a prominent private equity investor focused on technology, has marked down its software holdings as part of a broader industry reckoning triggered by an extended selloff in software stocks. The sector-wide decline has eliminated nearly $1 trillion in market value from software and services equities, reflecting intensified investor anxiety over artificial intelligence's potential to disrupt or obsolete traditional enterprise software business models.
The repricing has been severe. According to Evercore ISI equity strategists, the S&P 500 software and services index experienced its worst three-month performance since May 2002. Despite some recovery from the depths of the decline, the sector remains down approximately 25% from its October 2025 record high, a sharp contrast to the broader S&P 500, which has gained 1% over the same period. This divergence highlights the specific vulnerability of software equities to technological disruption concerns.
The markdown cascade extends beyond Hg's portfolio into deal-making activity across the sector. Reuters reporting from February 2026 documents that the software selloff is beginning to stall mergers and acquisitions and initial public offerings, as financial advisors and dealmakers report that volatile valuations make reliable pricing impossible. Buyers fear overpaying for assets that could face additional markdowns, while sellers resist transacting at depressed prices. As Vincenzo La Ruffa, managing partner at Aquiline Capital Partners, noted: "Some people can't afford to sell on the way down." Wally Cheng, head of global technology M&A at Morgan Stanley, described the market as trading on fear rather than fundamentals analysis, with investors failing to distinguish meaningfully between winners and losers in the sector.
The underlying driver is investor uncertainty about AI's existential threat to software companies. Dealmakers report that even if a buyer's fundamental view of a company hasn't deteriorated, the premium previously justified by growth assumptions becomes untenable after sharp repricing, unless deal terms are substantially reworked. This dynamic has created a "Darwinian moment" for private equity and private credit funds with meaningful software exposure, forcing asset markdowns that ripple through LP communications and capital allocation decisions across the alternative investment industry.
The repricing has been severe. According to Evercore ISI equity strategists, the S&P 500 software and services index experienced its worst three-month performance since May 2002. Despite some recovery from the depths of the decline, the sector remains down approximately 25% from its October 2025 record high, a sharp contrast to the broader S&P 500, which has gained 1% over the same period. This divergence highlights the specific vulnerability of software equities to technological disruption concerns.
The markdown cascade extends beyond Hg's portfolio into deal-making activity across the sector. Reuters reporting from February 2026 documents that the software selloff is beginning to stall mergers and acquisitions and initial public offerings, as financial advisors and dealmakers report that volatile valuations make reliable pricing impossible. Buyers fear overpaying for assets that could face additional markdowns, while sellers resist transacting at depressed prices. As Vincenzo La Ruffa, managing partner at Aquiline Capital Partners, noted: "Some people can't afford to sell on the way down." Wally Cheng, head of global technology M&A at Morgan Stanley, described the market as trading on fear rather than fundamentals analysis, with investors failing to distinguish meaningfully between winners and losers in the sector.
The underlying driver is investor uncertainty about AI's existential threat to software companies. Dealmakers report that even if a buyer's fundamental view of a company hasn't deteriorated, the premium previously justified by growth assumptions becomes untenable after sharp repricing, unless deal terms are substantially reworked. This dynamic has created a "Darwinian moment" for private equity and private credit funds with meaningful software exposure, forcing asset markdowns that ripple through LP communications and capital allocation decisions across the alternative investment industry.
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