A global stock market plunge that began in the tech sector this week is rapidly impacting financial firms specializing in private credit that have made substantial investments and loans to software makers perceived as vulnerable to the rise of artificial intelligence. Alternative asset managers, investment banks, and Business Development Companies (BDCs) are facing significant pressure. Following the release of the latest AI tool by startup Anthropic, which sparked concerns, investors have been fleeing software stocks, fearing that major players from Oracle to Datadog Inc. and FactSet Research Systems Inc. could be at risk. The core market worry is that these financial institutions might suffer substantial losses due to potential large-scale bad debts linked to these software creators.
The sell-off in software stocks has triggered declines in the shares of financial firms holding them, especially those employing leverage. The intensity of this selling has been amplified by crowded trades and a retreat by bullish investors. As the tech-heavy Nasdaq 100 index heads for its worst weekly performance since early April—a period marked by market turmoil from widespread tariffs introduced by then-President Donald Trump—the shockwaves have spread to other market segments, hitting parts of the financial sector hard.
An index tracking asset managers fell over 6% this week, while the Invesco Global Listed Private Equity ETF dropped more than 7%, both on track for their poorest weekly showings since April. Concurrently, the VanEck BDC Income ETF declined 5.6%, set for its largest weekly drop since October. As illustrated, private credit-related stocks have followed the software sector downward, with asset managers falling as investors fret over potential loan losses tied to the software industry.
Timing the market is exceptionally challenging, and sentiment-driven sell-offs are rarely prudent. However, investors are encouraged to review their exposures to ensure alignment with long-term plans. From a credit research perspective, the current situation appears more driven by emotional spillover and rising discount rates rather than a systemic bad debt crisis confirmed by financial statements. Multiple institutions have emphasized during earnings calls that their technology/software loan portfolios remain "high-quality/clean." Bloomberg Intelligence also noted that the impact of AI on software borrowers is unlikely to be immediately visible in credit data and will take time to materialize.
Key short-term indicators to monitor include software borrowers' Annual Recurring Revenue growth and net retention changes, the extent of price cuts or discounts, worsening customer concentration, an increase in non-accrual loans, fund redemption pressures, and the frequency of valuation markdowns. On the macro liquidity front, recent LSEG Lipper fund flow data already indicates declining risk appetite—with net outflows from the tech sector, a rotation into value-oriented industrial stocks and metal miners, and inflows into bonds and money market funds. This suggests the market is actively reallocating away from technology and high-beta/momentum strategies toward defensive/cash-flow visible assets.
In recent years, software has often ranked among the top industry exposures for many BDCs and private credit funds. When software stocks decline rapidly, the market immediately worries about two things: (1) lagging credit risk, where customer churn, price cuts, or renewal declines first erode EBITDA and cash flow before affecting debt coverage and defaults; and (2) narrowing financing and exit windows, where rising refinancing costs and slower M&A/IPO activity reduce the efficiency of private credit's "exit-driven" recovery. Consequently, investors often first sell leveraged managers and BDCs known for software lending, rapidly extrapolating risk through ETF and secondary market pricing.
Alternative asset manager Belden Inc., which initially focused on providing significant financing support to software companies, has been among the hardest hit in the financial sector. Its stock has fallen for 11 consecutive days, the longest losing streak since its 2021 IPO, with a cumulative decline of 26%, pushing the share price to its lowest level since August 2023. Stocks of BDCs aggregating private credit loans have also fallen to multi-year lows. Belden's tech-focused BDC is currently trading at its lowest level ever.
The software sector is often one of the largest industry exposure areas for BDCs. This week, investors have been anxiously awaiting optimistic signals from management teams like those at Belden, KKR & Co., and Ares Management Corp. during earnings calls with analysts, hoping to ease concerns about their book exposures to software. The co-founder of Belden stated on Thursday's earnings call that the tech portfolio, with its bias towards software, remains the highest quality and cleanest across all their portfolios. However, the severe problems investors fear are unlikely to appear immediately in earnings and portfolio metrics.
The challenge is that the impact of AI on software borrowers is unlikely to be immediately clear on credit assets and will take time to surface. The panic over software selling is adding pain to a sector already uneasy due to last year's threats from private credit. Last week, after a Belden-affiliated, tech-and-software-focused BDC significantly increased investor redemption capacity, investors withdrew approximately 15.4% of the fund's net assets. Meanwhile, BlackRock TCP Capital Corp., a private debt fund under the world's largest asset manager, BlackRock Inc., saw its largest drop in nearly six years after writing down a series of troubled investments.
Is the "software doom" narrative merely investors amplifying panic? Some professional investors believe the sell-off in private credit market-related stocks is exaggerated, especially as it is too early to judge the severity of the impact. Veteran executives in the software and chip industries generally view the "software doom" talk, triggered by the proxy AI agent trend, as an over-amplification of fear.
If this were truly an inflection point for BDCs, one would expect to see broad earnings deterioration and accelerating credit pressure. The recent price weakness appears more like emotional spillover than widespread balance sheet impairment. A senior analyst at Morgan Stanley wrote in a report on Wednesday that AI's disruption of the software industry could also create new ultimate winners, and a highly diversified portfolio could benefit significantly if these winners "more than offset one poor investment elsewhere."
The chief market strategist at Miller Tabak & Co. believes BDCs are due for a rebound; the question is timing. Concerns about AI disruption could also threaten large commercial banks by eroding M&A and Initial Public Offering activity. Since Tuesday, Goldman Sachs Group's stock has fallen nearly 6%, and Morgan Stanley is down 5%, both marking their worst three-day performance since November. The earnings of boutique investment banks serve as a good barometer for whether capital markets activity is being disrupted. For instance, Evercore Inc.'s CEO stated on Wednesday's earnings call that the firm does not currently see disruption to its business in the short to medium term. However, if market conditions remain turbulent for an extended period, that could change. It would be unrealistic to claim that a severely disordered market would not affect their business; it certainly could.