The global private equity and private credit markets, which have enjoyed a decade of unprecedented growth fueled by low interest rates and a robust technology sector, are now facing a period of intense scrutiny over the internal valuations of their software portfolios. As the public markets have aggressively repriced technology stocks in the wake of the generative artificial intelligence (AI) revolution, a growing chorus of industry leaders is warning that private market "marks"—the estimated values of non-public companies—have become dangerously decoupled from economic reality. This skepticism was recently punctuated by John Zito, co-president of Apollo Global Management’s asset management division, who suggested that the industry is currently operating under a set of valuations that are fundamentally flawed.
The core of the issue lies in the widening chasm between how public and private markets perceive the future of the software-as-a-service (SaaS) industry. While public software indices have experienced significant volatility, private equity firms have been slower to adjust the carrying value of their holdings. This phenomenon, often referred to by critics as "volatility laundering," allows private funds to report stable returns to their investors even when the underlying market conditions suggest a decline in value. However, as the structural shifts caused by AI platforms like OpenAI and Anthropic begin to reshape the competitive landscape, the sustainability of these stale valuations is being questioned by some of the most influential figures in finance.
For years, the software sector was the darling of the private equity world. The recurring revenue models and high margins of enterprise software companies made them ideal candidates for leveraged buyouts. Between 2018 and 2022, a period characterized by near-zero interest rates and a "growth at all costs" mentality, private equity firms poured billions into software companies at historically high multiples. During this window, many firms were acquired at valuations exceeding 20 times their annual recurring revenue (ARR). Today, those same companies are operating in a radically different environment where the cost of capital has surged and the "moats" protecting their business models are being breached by rapid technological advancement.
The emergence of sophisticated AI tools has introduced a new layer of existential risk for legacy software providers. Investors are increasingly concerned that the current generation of enterprise tools—many of which focus on specific workflow tasks—will be rendered obsolete by AI agents capable of automating those same processes more efficiently and at a lower cost. This fear has already manifested in the public markets, where mid-cap software companies have seen their stock prices punished as investors rotate capital toward the infrastructure providers of the AI age. According to market analysts, if a company’s primary value proposition is a user interface that manages a database, it is now at high risk of being bypassed by large language models (LLMs).
This shift has direct implications for the private credit market, which has become the primary engine for financing private equity deals. Private credit has ballooned into a $1.7 trillion asset class, with a significant portion of that capital concentrated in software lending. When a private equity firm buys a software company, it often uses debt provided by a private credit fund. If the valuation of the equity is "wrong," as Zito suggests, it implies that the underlying debt may also be impaired. Zito’s assessment is particularly grim regarding the potential recovery rates for these loans. He warned that in a worst-case scenario where a software firm is on the wrong side of the AI shift, lenders might only recoup between 20 and 40 cents on the dollar—a staggering loss for an asset class marketed as a safe, senior-secured alternative to traditional bonds.
The pressure on these valuations is already triggering a liquidity crunch. Retail and institutional investors, sensing a mismatch between reported returns and market reality, have begun pulling their capital. Reports indicate that approximately $10 billion was withdrawn from private credit funds in the first quarter of the year alone. This wave of redemptions is forcing fund managers to defend their portfolios, with many arguing that the underlying companies remain fundamentally healthy and continue to generate strong cash flow. However, the market’s skepticism is being validated by the actions of major financial institutions. JPMorgan Chase, for instance, has recently begun marking down the value of its software loans and reining in its exposure to private credit players, signaling a broader institutional retreat from the sector’s most overextended segments.
The "vintage" of these investments is a critical factor in their current vulnerability. The deals struck between 2018 and 2022 are particularly exposed because they were predicated on a set of economic assumptions that no longer exist. In that era, debt was cheap, and exit multiples were expected to remain high indefinitely. Now, these companies are faced with the "double whammy" of higher interest expenses and lower exit valuations. A company that was valued at $1 billion in 2021 based on a 15x multiple may only command an 8x multiple today. If that company is also struggling to maintain its market share against AI-native competitors, the equity value can evaporate entirely, leaving the debt holders to fight over the remains.
Apollo Global Management has sought to distance itself from these industry-wide concerns by highlighting its conservative approach to the sector. The firm notes that its exposure to software represents less than 2% of its total assets under management and consists primarily of loans to large-cap, investment-grade companies rather than the more speculative mid-market firms that have dominated recent private equity activity. This distinction is crucial; while the software sector as a whole is under pressure, the impact is not uniform. Larger, more diversified tech giants often have the resources to integrate AI into their existing ecosystems, whereas smaller, "point-solution" companies may find themselves unable to compete.
The broader economic impact of a potential private market correction could be significant. Unlike the public markets, where price discovery happens in real-time, the private markets can remain opaque for extended periods. A sudden, synchronized markdown of software assets could lead to a "denominator effect," where institutional investors like pension funds find themselves over-allocated to private equity as the value of their holdings drops. This, in turn, could freeze new commitments to the asset class, slowing the flow of capital to the broader economy.
Global comparisons further illustrate the unique challenges facing the U.S. software market. While European and Asian private equity markets also saw increased tech activity during the pandemic, the concentration of high-multiple SaaS deals was most pronounced in North America. Consequently, the fallout from a valuation reset is expected to be most acute in the U.S. financial centers. Economic analysts suggest that we are entering a period of "creative destruction" within the software industry, where the winners of the last decade are replaced by a new cohort of AI-first enterprises.
Despite the warnings from figures like Zito, Jeffrey Gundlach, and Mohamed El-Erian, some proponents of private credit remain optimistic. They argue that the flexibility of private lending—where lenders can work directly with borrowers to restructure debt—will prevent a widespread wave of defaults. This "amend and pretend" strategy has worked in previous cycles, allowing firms to extend loan maturities in the hope that market conditions improve. However, critics argue that AI is a structural change, not a cyclical one, and that no amount of financial engineering can save a company whose product has become obsolete.
Ultimately, the debate over software valuations is a referendum on the transparency and discipline of the private markets. For years, the lack of daily price volatility was seen as a feature of private equity, providing a "sleep-at-night" factor for long-term investors. But if those stable returns are based on "wrong" marks that ignore the transformative power of AI and the reality of higher interest rates, the eventual awakening could be painful. As the industry moves forward, the focus will likely shift toward more rigorous, market-based valuation methodologies and a renewed emphasis on backing companies with durable, AI-resistant business models. For those who failed to account for these shifts, the "bad ending" predicted by industry veterans may be fast approaching.
