Fears over AI's disruption of traditional software business models are spreading from the stock market to the opaque private equity market. On February 3rd local time, as Goldman Sachs and Barclays successively released reports highlighting significant risks in the software sector, US-listed private equity firms and business development companies encountered a new wave of selling pressure. Investors are concerned that the hundreds of billions of dollars in non-public software debt held by these institutions may be facing severe valuation markdown risks. The market reacted swiftly on Monday, with shares of Blue Owl Capital falling approximately 5%, while industry leaders such as Ares Capital, Sixth Street Specialty Lending, and Trinity Capital all dropped more than 3%.

A major capital flight is underway, characterized by a sell-off in software stocks and a pivot towards chip stocks. The immediate trigger for this sell-off was a capital flows report from Goldman Sachs's Prime Brokerage division. The report indicated that hedge funds are executing a sector rotation at a record pace: aggressively offloading software stocks while simultaneously making substantial purchases of semiconductor stocks. Goldman Sachs stated bluntly in its report:

"Last Thursday saw the highest level of net selling in the tech sector since September 2024, with all sub-sectors in net selling territory, led by the software segment. Conversely, the semiconductors and equipment sector was the sub-industry with the highest net purchases this week... its net exposure reached a record high of 8.7% by the week's end."

This extreme sentiment is now cascading downstream. According to Bloomberg, an index tracking software stocks plummeted 15% in January, marking its worst monthly decline since October 2008. This panic has directly impacted private credit institutions that provide financing to software companies. Unlike the broad concerns over subprime risks prevalent in November of last year, today's sell-off reflects a deep-seated anxiety about the "software industry being crushed by AI." Last week, prices for software loans in the broadly syndicated loan market fell by approximately 4 points. Barclays: A 20% "Invisible" Risk Exposure The market's greatest fear is that the massive volume of software debt held within BDC portfolios could be facing the risk of a valuation collapse. Barclays analyst Peter Troisi pointed out in a recent research note:

"Software is the largest industry exposure for BDCs, comprising approximately 20% of portfolios, making the sector particularly sensitive to recent declines in software equity and credit valuations."

According to PitchBook data, this total exposure amounted to roughly $100 billion as of the third quarter of last year. When including business products and services, the related exposure percentage climbs as high as 30%. Barclays warned that although publicly traded software stocks have fallen 15% this year, BDCs primarily hold private credit loans without public quotes. This means the public market crash will not be immediately reflected in the BDCs' net asset values.

"Most BDCs won't report Q4 earnings until late February or March. Even then, the fair value marks as of December 31, 2025, will not reflect the recent sharp valuation declines."

This valuation "time lag" is fueling further investor panic—because it represents a bottomless pit of uncertainty.

UBS Warning: Default Rates Could Soar to 13% If AI indeed leads to the widespread obsolescence of traditional software companies, the consequences could be disastrous. Strategists at UBS Group AG offered a startling prediction in a report on Monday: default rates in the US private credit market could potentially surge to as high as 13% if artificial intelligence triggers "aggressive" disruption among corporate borrowers. This viewpoint is not without foundation. As early as the end of 2025, PE giant Apollo Global Management had already begun taking action. According to a prior Financial Times report, Apollo CEO Marc Rowan explicitly stated his intention to reduce the total software exposure in the firm's credit funds from 20% to below 10%. Apollo even took short positions against bonds of several software companies, including Internet Brands, which is owned by KKR. Rowan stated at the time:

"I don't know if the enterprise software industry will ultimately be a beneficiary or be destroyed by this. But as a lender, I'm not sure I want to be there to find out."

Market View: Overreaction or Precursor to Crisis? Despite the spreading panic, some analysts believe the market reaction may be overblown. Mitchel Penn, a senior analyst covering BDCs at Oppenheimer, suggested that aside from speculation and emotional venting, there is currently no new fundamental information to explain such a sharp decline:

"Typically on days like this, we tell clients to buy, because there's no new information that would allow you to understand why it's down."

However, a recent series of negative developments has left investors on edge. Just last week, a tech-focused fund managed by Blue Owl was forced to relax withdrawal restrictions due to a surge in investor redemption requests, leading to an outflow of approximately 15.4% of its net assets. Simultaneously, BlackRock's private debt fund, TCP Capital Corp., saw its shares suffer their largest drop in nearly six years after disclosing a series of investment write-downs. Until the earnings season formally unveils the true value of these "black box" assets, the market appears to have decided to sell first and ask questions later.