Software Skyfall: When Multiples Meet Gravity

The average software stock is down 25% over the past year. That underperformance reflects a market waking up to AI-driven disruption across SaaS. Generative tools are enabling cheaper, more efficient, and more robust functionality, pressuring traditional subscription models and compressing once-premium margins. Investors are now reassessing exposure and asking harder questions about durability.

Private credit faces meaningful pressure given its heavy exposure to software and SaaS borrowers. This harsh assessment can be categorized into three separate and distinct outcomes:

Scenario 1: The company adapts and thrives. AI becomes an accelerant, creative destruction strengthens the franchise, and lenders are repaid at par.

Scenario 2: The business survives, but valuation multiples compress 50–60%. Equity is wiped out, refinancing proves elusive, and lenders take control through restructuring (see chart below)

Scenario 3: The company fails to adapt, its moat narrows, competitive intensity rises, margins erode, and when it files BK, recoveries disappoint.

Sharp enterprise value declines are already triggering refinancing challenges. Significant maturities over the next two years will intensify this dysfunctional dynamic. AI disruption, point to rising defaults as a growing list of software credits hit the wall. Investors must be very selective, as this becomes an increasingly important risk factor to analyze.

This is a growing concern for the BSL Market too. News that leading banks are unable to offload a recent deal from top-tier PE sponsors with deep software expertise weighs heavily while greater than 35% software names in BSL market trade below 95. Public BDCs are down 18% over the past 12 months vs. S&P 500 which is up 16% over this period. With roughly 25% exposure to software, BDCs are trading poorly with 90% trading below NAV.

Takeaways: 1) Firms like Marathon Asset Management have lived through harsh market forces and structural changes and have come out stronger, this includes the dot com bubble at the turn of the century, sub-prime crisis during the GFC, collapse in energy sector in 2016, and damage to CRE market when financing rates rose 500+ bps in 2022-2023 resulting in harsh times for CRE market, 2) AI is young, the market has finally woken up to potential for disruption in software sector, which is now underway, 3) significant investment opportunities will arise, patience, discipline, expertise and experience will be key, 4) stay underweight software, 5) Direct Lending is under the spotlight, seasoned portfolios with low leverage to stable companies and little/no software exposure is your ideal candidate, 6) Opportunistic Credit and ABL should be the standout performers in the current cycle.

I have been publicly warning about the disruption in the software sector for over a year and Marathon is well positioned with minimal software exposure given this view.