Amid concerns that AI is disrupting the software sector, major US private equity firms are grappling with multiple challenges, including slowing fundraising, delayed asset exits, and rising redemption pressures. Software assets have been a cornerstone of private equity investment over the past decade, but this foundation is now showing signs of instability, threatening the industry's growth rationale and profit model.

On February 5, KKR & Co LP and Blue Owl issued warnings about their 2026 financial outlook during earnings calls. KKR's Chief Financial Officer, Robert Lewin, stated that if market conditions deteriorate, the company might postpone some asset sales planned for this year. Such delays would reduce cash flow and lead to lower earnings in 2026.

Blue Owl disclosed an increase in redemption requests for its credit funds, which contributed to the company missing its long-term growth targets. It now anticipates only "modest" fee growth for 2026, a significant slowdown compared to the approximately 20% growth in assets and fees projected for 2025.

On Thursday, shares of the three leading US private equity firms declined across the board. Ares Management Corp fell over 11% to $121.87, KKR dropped 5.5% to $99.19, and Blue Owl declined 3.8% to $11.65. Since the start of the year, these three firms, along with peers including Blackstone, have seen their stock prices fall more than 15% as investors reassess their growth prospects.

The core of this selloff lies in a fundamental shift in market logic. Over the past decade, the software-as-a-service (SaaS) industry, with its stable annual recurring revenue (ARR), became the most favored asset class for private credit. However, as the risk of AI replacing coding and data analysis functions grows, this "bond-like" stability narrative is collapsing. Data from Bloomberg Intelligence indicates that over the past four weeks, more than $17.7 billion in loans to technology companies have fallen into distressed territory.

Analysts note that such volatility is prompting private capital groups to consider delaying asset sales—which would impair their ability to generate substantial performance fees—while overall asset growth slows as investors withdraw from certain funds or postpone new investments.

Delayed asset exits and rising redemption pressures are directly impacting the core business model of private capital firms. Postponed sales mean deferred performance fee income, and redemption pressures threaten the sustained growth of assets under management.

Robert Lewin noted on the call that if conditions worsen, profit realization would be pushed into later years, though he emphasized that KKR remains "very positive" about the future.

Blue Owl's CFO, Alan Kirshenbaum, stated that amid rising redemption requests, the technology-focused private capital group expects only "modest" fee growth in 2026.

Analysts view this cautious guidance as a marked slowdown. Last year, the company set an ambitious target to manage over $500 billion in assets by 2029, with annual fee-related earnings exceeding $3.1 billion.

Despite these challenges, fourth-quarter results for the three firms were mixed, though asset growth remained strong. Ares recorded a record $34.4 billion in capital inflows in the three months ending December, lifting its assets under management to a new high of $623 billion.

KKR's assets grew 17% year-over-year to $744 billion, with fee-related earnings up 15%, meeting expectations. However, adjusted net income came in at $1.12 per share, weighed down by two factors: the return of over $200 million in performance fees to clients of its 2013 Japan fund, and lower-than-expected gains from asset sales.

Blue Owl secured $12 billion in new capital commitments, and leverage across its funds increased by $5.3 billion, bringing total assets under management to $307 billion. Its fee-related earnings of $417 million rose 22% year-over-year, beating Wall Street expectations, though its $187 billion in fee-paying assets slightly missed analyst forecasts.

During earnings calls, analysts pressed executives from KKR, Ares, and Blue Owl on their exposure to software company loans and whether AI could lead to higher default rates and significant losses.

Blue Owl CEO Marc Lipschultz took a firm stance, calling talk of widespread obsolescence among software companies "ridiculous" and stating that it was "mathematically impossible" for the firm's loan portfolio to experience a surge in defaults.

"We are not seeing material losses. We are not seeing deterioration in the portfolio," he said, estimating that companies borrowing from Blue Owl saw profit growth of 14% last quarter.

KKR Co-President Scott Nuttall said the firm's deal teams have been preparing for AI-related disruption for years, selling off companies deemed vulnerable. "Our level of anxiety is fairly low because we’ve been thinking about this for the last several years," Nuttall said, predicting that recent "dislocation creates a number of significant opportunities for us."

Ares also sought to clarify its total software exposure on Thursday. The company disclosed that software accounts for 9% of its private credit managed assets, including its real estate and infrastructure debt businesses. CEO Mike Arougheti said on the call that non-performing loans in its software portfolio are "close to zero" and that Ares' growth outlook remains "unchanged" despite AI risks.

The private credit market is undergoing two simultaneous "unwindings."

First, the logic of lending to software companies has broken down. Annual recurring revenue was once seen as providing stable, bond-like cash flow, justifying lending even when free cash flow was negative. But when a business model suddenly faces obsolescence risk, that "stable annuity" becomes a binary bet.

Second, the appeal of private credit itself is fading. As public market yields catch up, the promised "liquidity premium" looks less attractive. And the so-called insulation effect—limited volatility due to a lack of daily mark-to-market pricing—becomes harder to sell when defaults are now perceived as a real risk.

Jeffrey Favuzza of Jefferies' equity trading desk described the current situation as a "SaaS Armageddon," noting that trading behavior reflects a "get me out at any cost" panic, with no signs of stabilization yet.

Analysis suggests that as software equity valuations plummet, private credit lenders face pressure to revalue their balance sheets, potentially leading to tighter credit conditions. This could further squeeze growth prospects for software companies already facing existential challenges, creating a dangerous negative feedback loop.