U.S. Stocks "SaaS Doomsday" Arrives: "Software-PE" Falls into a "Death Spiral"

The software industry is facing an existential crisis triggered by artificial intelligence, with ripple effects spreading to the private credit market, creating a dangerous negative feedback loop.

Goldman Sachs data shows that the S&P North America Software Index has declined for three consecutive weeks, with a 15% plunge in January—the largest monthly drop since October 2008. This panic intensified further on Tuesday, after AI startup Anthropic released a productivity tool for in-house legal teams, causing legal software and publishing company stocks to plummet.

Jeffrey Favuzza of Jefferies’ equity trading division described the current situation as “SaaS doomsday,” pointing out that the current trading style is entirely a “get me out” panic selling, with no signs of stabilization or bottoming out yet.

This shock is not limited to the stock market but is rapidly transmitting to the private credit sector that provides substantial financing to the software industry. Barclays analysts noted that the software sector is the largest risk exposure for Business Development Companies (BDCs), accounting for about 20% of their portfolios, with a total size reaching approximately $100 billion in Q3 last year. As software valuations plummet, stocks of BDCs like Blue Owl, Blackstone, and Ares have also declined.

Analysis from JPMorgan and Goldman Sachs shows that the market is experiencing unprecedented divergence: on one side are semiconductor companies benefiting from the AI supercycle, and on the other are software companies seen as the biggest losers. As software equity valuations collapse, private credit institutions face asset-liability revaluation pressures, which could tighten credit and further squeeze the growth prospects of already struggling software companies, creating a “death spiral.”

Panic Selling of Software Stocks

Market pessimism toward the software industry has been brewing for months, with Anthropic’s release of the Claude Cowork tool acting as a catalyst for panic. Investors worry that, as AI technology advances, the moat around traditional software companies will become increasingly shallow, squeezing pricing power and even risking complete displacement.

Jeffrey Favuzza from Jefferies stated that there is a “harsh view” in the market, suggesting that the outlook for the software industry could become the next “print media or department store.” While long-term opportunities for attractive buy-ins may still exist, even after heavy selling, investors currently lack confidence to enter the market.

Thomas Shipp, head of stock research at LPL Financial, also pointed out that the uncertainty brought by AI widens the range of possible growth outcomes for software companies, making it difficult for the market to assign a fair valuation or determine what constitutes “cheap.”

Goldman Sachs data further confirms this panic: Hedge fund positions between semiconductor and software stocks have reached historic extremes. FactSet data shows that, although some companies still pass earnings assessments, the pass rate is declining, masking a brutal internal industry淘汰 process beneath overall healthy data.

Hundreds of Billions at Risk in Private Credit

The collapse of the SaaS sector is not just a stock market issue but also a hidden risk in the debt market. Barclays analyst Peter Troisi pointed out that the BDC industry is particularly sensitive to declines in software stock and credit valuations. As of Q3 last year, the total exposure of BDCs to the software sector was about $100 billion.

This risk exposure creates a dangerous link between private credit and software companies. As software company equity values shrink, BDCs—acting as lenders—face asset impairment pressures. Large institutions like Blue Owl, Blackstone, and Ares have recently seen stock fluctuations, reflecting market concerns about this contagion effect.

Morgan Stanley credit analyst Kabir Caprihan noted in a recent report that, although BDC managers have assessed and stress-tested their software exposure over the past year, market reactions suggest investors worry that any turbulence in the software sector could cause BDCs to “catch a cold.” Currently, software loans account for about 16% of Morgan Stanley’s tracked BDC loan portfolios, totaling around $70 billion.

UBS strategists warned that if AI causes aggressive disruption to corporate borrowers, U.S. private credit default rates could soar to 13%.

Stress Tests and Asset-Specific Risks

To quantify potential losses, JPMorgan conducted stress tests on BDC portfolios. Under a simple hypothetical scenario (33% default rate, 33% zombie companies), approximately 30 tracked BDCs could face losses of $22 billion, reducing net asset value by 11%. In a more extreme “harsh scenario” (75% default rate, 10% recovery), cumulative net losses could approach $50 billion, diluting book value by 24%.

Specific loan assets are already showing signs of stress. JPMorgan emphasized that some secondary market transactions for software loans are trading at prices significantly below their book valuations:

Cloudera: held by NMFC and BCRED, with an average book value of about 97, but recent secondary market prices have fallen to around 85.

Cornerstone OnDemand: held by six BDCs including Blue Owl, with its term loan trading down about 10 points since November 2025, at around 83, while the BDCs’ average book value remains at 97.

Finastra: held by nine BDCs, with trading prices down to 88, compared to an average book value of 101.

JPMorgan believes that, although it’s difficult to distinguish which software companies will survive, it’s clear that not all BDCs will suffer equally. Lower-leverage institutions (like OTF) may be more resilient in the face of asset impairments. However, current market sentiment indicates investors prefer to sell first and wait for clarity, putting the private credit market under severe stress similar to during pandemics or geopolitical crises.

Risk Warnings and Disclaimers

Market risks are inherent; investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest accordingly at your own risk.