Key Takeaways
- • Software loan bid prices collapsed to 86 cents on the dollar in mid-March 2026 from 92.2 cents in February, signaling a sharp reassessment of credit risk across the software and technology sector amid a cyclical downturn.
- • Private equity and private credit firms face potential losses after fueling a post-pandemic software buying spree at inflated valuations (2021–2022), with rising interest rates and declining software growth rates compressing valuations and triggering markdowns on private loans.
- • AI-driven productivity tools released by companies including Anthropic are pressuring software company revenues by making code generation easier and cheaper, compounding weak software growth rates and creating new default risks for leveraged lenders.
- • Private credit inflows have masked underlying problems in the sector; markdowns on software debt are expected to trigger a reversal of capital flows, shifting from inflows to potential net outflows as investors reassess risk.
- • The outlook for multiple Federal Reserve rate cuts in 2026 has deteriorated, removing a key tailwind for valuations and leaving software companies with elevated debt burdens and compressed multiples.
Summary
The software debt market is experiencing a cyclical downturn that threatens significant losses for private equity and private credit investors who aggressively deployed capital into the sector during the post-pandemic boom. According to S&P Global Market Intelligence, the median software loan bid price declined sharply to 86 cents on the dollar in mid-March 2026 from 92.2 cents in February, approaching depressed territory and signaling a fundamental repricing of credit risk across the technology ecosystem.
The deterioration reflects a confluence of pressures on software valuations and credit metrics. Private equity firms embarked on an aggressive acquisition spree in 2021 and 2022, paying elevated multiples as software growth rates exceeded 20% amid digital transformation tailwinds. However, rising interest rates—combined with a dimming outlook for Federal Reserve rate cuts in 2026—have compressed valuations and squeezed borrowers with floating-rate debt obligations. Simultaneously, software growth rates have decelerated significantly from pandemic peaks, eroding the fundamental case for high multiples.
A new dimension of risk has emerged from artificial intelligence. AI productivity tools released by companies including Anthropic are enabling developers to write code faster and at lower cost, directly pressuring revenue and margin assumptions embedded in software company valuations and loan underwriting. This disruption compounds already-weak organic growth and forces lenders to reassess default probabilities across portfolios.
According to Greg Obenshain, head of private credit at asset manager Verdad, speaking to S&P Global Market Intelligence, "This is how the cycle turns. Private credit has seen incredible inflows, which allowed them to mask a lot of problems, but markdowns will stop the inflows, which can eventually turn into net outflows." The warning underscores a critical vulnerability in private credit markets: strong capital flows have obscured deteriorating credit fundamentals, and price discovery through markdowns threatens to reverse investor sentiment and trigger capital outflows.
The software sell-off carries systemic implications for the broader private credit market, which manages approximately $3 trillion in assets. Private credit rushed into software lending as traditional banks pulled back, creating concentrated exposure to a sector now facing cyclical headwinds, AI-driven disruption, and valuations significantly compressed from 2021–2022 peaks. Institutional investors and hedge funds with exposure to private credit funds focused on software must prepare for additional valuation marks and potential liquidity constraints.
The deterioration reflects a confluence of pressures on software valuations and credit metrics. Private equity firms embarked on an aggressive acquisition spree in 2021 and 2022, paying elevated multiples as software growth rates exceeded 20% amid digital transformation tailwinds. However, rising interest rates—combined with a dimming outlook for Federal Reserve rate cuts in 2026—have compressed valuations and squeezed borrowers with floating-rate debt obligations. Simultaneously, software growth rates have decelerated significantly from pandemic peaks, eroding the fundamental case for high multiples.
A new dimension of risk has emerged from artificial intelligence. AI productivity tools released by companies including Anthropic are enabling developers to write code faster and at lower cost, directly pressuring revenue and margin assumptions embedded in software company valuations and loan underwriting. This disruption compounds already-weak organic growth and forces lenders to reassess default probabilities across portfolios.
According to Greg Obenshain, head of private credit at asset manager Verdad, speaking to S&P Global Market Intelligence, "This is how the cycle turns. Private credit has seen incredible inflows, which allowed them to mask a lot of problems, but markdowns will stop the inflows, which can eventually turn into net outflows." The warning underscores a critical vulnerability in private credit markets: strong capital flows have obscured deteriorating credit fundamentals, and price discovery through markdowns threatens to reverse investor sentiment and trigger capital outflows.
The software sell-off carries systemic implications for the broader private credit market, which manages approximately $3 trillion in assets. Private credit rushed into software lending as traditional banks pulled back, creating concentrated exposure to a sector now facing cyclical headwinds, AI-driven disruption, and valuations significantly compressed from 2021–2022 peaks. Institutional investors and hedge funds with exposure to private credit funds focused on software must prepare for additional valuation marks and potential liquidity constraints.
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