AI is forcing private credit to liquidate huge software bets, and prominent investors told CNBC that the technology will create winners and losers rather than being wiped out in a so-called “circuspocalypse.”
Corporate private credit specialist Ares and men grouptold CNBC that AI will force lenders to differentiate between adaptive and disruptive software companies.
When concerns about “SaaSpocalypse” surfaced earlier this year, Ares co-president Blair Jacobson said the company took notice — “but it wasn’t a huge surprise.”
Jacobson said the conversation around how AI will impact businesses has changed since February’s selloff in tech stocks, sparked by concerns that AI would make much software obsolete.
Software stocks have pared their losses since then, with the iShares Expanded Technology Software Sector ETF soaring 21% in May and up 9% on a three-month basis.
“There’s now a perception that there are going to be winners and losers,” Jacobson said, speaking to CNBC’s Annette Weisbach on the second day of this year’s SuperReturn International Private Equity Venture Capital Conference in Berlin.
“Some companies will be able to adapt to AI, while others will face additional challenges. We know there are both opportunities and risks in loan and bond prices, and in software stock prices in general.”
price of failure
Jacobson said Ares, which has been investing in software for more than 15 years, sees opportunities for companies that provide mission-critical services such as enterprise resource planning systems in regulated industries. Switching (or failure) costs can be high in these areas, giving stronger software businesses a layer of protection even as AI disrupts the broader market.
“The cost of failure is so high that I think we’ll continue to see more divergent outcomes,” Jacobson said.
“We continue to finance software, and as a result… spreads are getting wider, documentation is getting tighter, and loans to value are declining. As a credit investor, this is a very attractive trend.”
Kevin Marchetti, chief investment officer and head of U.S. direct lending at Man Group, said private credit has emerged as a major source of funding for the software sector, with exposure to alternative financial institutions increasing to an average of 20% to 30% over the past five years.
Ares.
Marchetti said AI is now a major test of private credit theory in software, comparable to the disruptive variables that have posed challenges to other sectors in past decades.
He said Man Group is increasingly focusing on “old economy” businesses where AI is more likely to enhance operations rather than upend business models.
These include “critical B2B healthcare services, distribution companies that are focused on serving America’s Main Street and beyond, where we fundamentally believe that AI can enable those businesses, unlock future value, and improve the efficiency and productivity of those companies,” Marchetti told CNBC on Wednesday’s Super Return.
“Software trust theory is being tested, but I think there are still very good companies in this space, and we’re just figuring out what that will look like over the next three to five years.”
group of men.
HarbourVest Partners CEO John Toomey said the industry realized “almost overnight” that AI could threaten established software businesses, but the software sector is still in the early stages of AI adoption.
While some investors are concerned about a broader shakeout in the SaaS industry, Toomey suggested that “sentiment seems to be washing away too much fundamentals.”
He said certain companies will inevitably face “very significant headwinds,” but others will adapt and turn them into tailwinds and “deploy end services that provide value to customers.”
“Make no mistake about it: AI is going to impact every business, every industry, every company, and the rate of adoption across industries and companies will increasingly determine individual success in a competitive world,” Toomey said.
“Just as we’re talking about a K-shaped recovery in the economy, I think we’ll see a K-shaped outcome in the software sector.”
He added, “I think the idea that employees in any of our businesses would simply vibe-code and create unique solutions that are better than what established enterprise or centralized software businesses offer is very far-fetched.”
Correction: This story has been updated to correct the spelling of Brian Jacobson’s name.
