Software-as-a-Service selloff and the implications for private markets

The global Software-as-a-Service (SaaS) market reached a valuation of US$315.68 billion in 2025 and analyst projections suggest it can grow to US$1,482.44 billion by 2034, exhibiting a CAGR of 18.7% during the forecast period. North America dominated the global market with a share of 46.9% in 2025.¹

Several factors have fueled the growth of the SaaS market, such as integration with other tools, the rise in adoption of public and hybrid cloud-based solutions, and centralized data-driven analytics. The COVID-19 pandemic was a catalyst for SaaS utilization as remote work required various SaaS solutions. According to industry experts, 73% of organizations used SaaS applications in 2023.² This percentage is growing as more companies move to the cloud, driven by benefits such as cost efficiency, scalability and remote work capabilities. Furthermore, generative AI is accelerating the growth of SaaS, and companies are committing capital to further development of SaaS solutions.

Private credit and private equity funds built large allocations to software due to the sector's blend of innovation, strong financial fundamentals and resilience against economic fluctuations. Software companies consistently drive technological advancements, enabling investors to capitalize on emerging trends. Their asset-light business models, predictable cash flows (with reliable revenue streams due to subscription-based, enterprise accounts) and flexibility in financing make them attractive targets for structured investment strategies.

Additionally, the high switching costs of changing software providers has meant that customers have typically kept coming back. Software’s vital role in modern operations facilitates greater stability, reduced risk and long-term growth, which are highly appealing to private market investors.

What has changed?

The recent sell-off in public market SaaS equities accelerated with Anthropic’s Claude release, which caused investors to fear that agentic AI could displace software workflows rather than merely augment them. However, we believe the magnitude of the drawdown reflected a broader valuation reset already underway, resulting from slowing growth and an increased emphasis on profitability.

The sell-off triggered a sharp reassessment of credit risk and valuations across the software and technology ecosystem, with implications for private markets. Many of the SaaS companies came to the market with a lot of debt and reached peak valuations (2021-2022). Software companies often sought capital from private credit managers.

The concern facing the software industry is not the extinction of software itself, but rather a fundamental shift in valuations and usage.

AI has fundamentally transformed the landscape by shifting how and where value is generated within these systems. Established software companies maintain advantages through strong customer ties, contracts and valuable proprietary data that enhance their products and AI features. Switching to new providers is often costly and risky, so companies prefer established solutions with AI features as an augmentation. The most effective AI applications integrate seamlessly with existing software rather than operating as standalone tools.

What is the impact on private markets valuations?

As public software valuations reset amid fears of AI driven disruption, investors are now questioning potential risks in private markets, given the exposure to software companies. The current narrative argues that generative AI provides scale and efficiency, undermining traditional moats. Valuations may need to reset, or the disruption could be overblown in certain segments of the markets.

We believe that it is important to avoid overreacting and generalizing about the entire SaaS market. We believe that managers should carefully assess their software assets across vintages, entry points and market cycles. There will likely be big differences in where the company sits in the software stack—the variety of front-end and back-end programming, databases and libraries used in software—and whether it is related to AI infrastructure or application software, which may be easier to disintermediate.

Managers should review the valuations and outlook for each asset rather than arbitrarily treating them all the same. As valuations reset, we think there could be opportunities due to market mispricing, much like we have experienced with other market-moving events.

What is the impact on private credit?

According to Morgan Stanley, the estimated exposure of business development companies (BDCs) portfolios to software and IT services is approximately 26%, based on third-quarter 2025 data on 42 public BDCs.³ This accounts for about 30% of the assets under management of the BDC universe, which includes public, private and perpetual BDCs. The Morgan Stanley report notes that the maturity schedule of the US software loans is more front-loaded than the broader market, with roughly 30% of software loans maturing by 2028, and 46% of the debt maturing in the next four years.

Note that not all BDCs or private credit funds have the same exposures to the software sector, and credit quality can vary greatly from one fund to the next. Advisors should evaluate each fund’s exposure to software separately.

Broadly, private credit managers have the flexibility to tailor lending agreements to address specific concerns related to software-sector volatility, such as including stronger covenants,⁴ enhanced reporting requirements or tighter collateral provisions. Careful structuring of loan terms serves as an important risk-management tool and may help to preserve value even as valuations reset and market conditions fluctuate.

Additionally, by carefully evaluating each asset and fund's exposure to software, managers and advisors can try to identify where vulnerabilities may exist and distinguish between those companies or portfolios that are more resilient to AI disruption and those that are more exposed.

Software companies’ exposure to AI varies meaningfully across where they sit in the stack. Some operate as AI enablers, supplying infrastructure, data platforms or tools that support model training and deployment. Others deliver AI‑enabled enterprise solutions, embedding AI into workflows to drive efficiency and automation. A third group focuses on end‑user applications, monetizing AI directly through consumer or business products. These differences (among these stacks and within each of these stacks) translate into distinct growth profiles, margins and competitive dynamics, and they are increasingly shaping how investors differentiate winners and losers across the software sector.

A targeted approach allows for more strategic capital allocation and the ability to capitalize on opportunities that may arise from market mispricing, rather than simply reacting to broad market fears.

Key takeaways

Public and private markets will likely need to reset valuations as the impact of AI evolves over time. We believe the impact of AI disruption will likely be uneven across SaaS companies as well as across BDCs and private credit funds. As always, asking the right questions before allocating capital is important.

• What is the experience of the manager? Focus on managers/funds with deep and dedicated resources. Do they have robust underwriting standards?
• What is the exposure to SaaS? Understand the amount and types of exposures in the portfolio. Is there a concentration risk?
• How are you valuing securities? What is the methodology for valuing securities? Is an independent third party conducting the valuation?

We do not believe that there is a systemic problem with the SaaS sector. We believe that some funds will feel the impact of this disruption more than others, and seasoned managers will be best equipped to weather the impact over time.