Private credit lenders say their big software bet faces an AI reckoning — but not a ‘SaaSpocalypse'

AI is forcing a reckoning for private credit's huge software bet, with prominent investors telling CNBC that the technology will forge winners and losers, rather than wipe it out in the so-called "SaaSpocalypse."

Private credit specialists at firms, including Ares and Man Group, told CNBC that AI would force lenders to distinguish between software companies that could adapt and those that would disruption.

When concerns around the "SaaSpocalypse," or software apocalypse, emerged earlier this year, Ares co-president Blair Jacobsen said the firm took notice —"but it wasn't a big surprise."

Jacobsen said the dialog around AI's impact on companies has shifted since the sharp tech sell-off in February, sparked by fears that AI would make much software obsolete.

Software stocks have since pared losses, with the iShares Expanded Tech-Software Sector ETF surging 21% in May, and advancing 9% on a three-month basis.

"Now there's a view there will be winners and losers," said Jacobsen, who was speaking to CNBC's Annette Weisbach on day two of this year's SuperReturn International private equity and venture capital conference in Berlin.

"Some companies will be able to adapt to AI, and some will face more challenges. We've seen that in loan and bond prices, the equity prices of software in general — there are both opportunities and risks."

Jacobsen said that Ares, which has invested in software for more than 15 years, sees opportunity in companies that provide mission-critical services, including enterprise resource planning systems in regulated industries. In those areas, the cost of switching — or failure — can be high, giving stronger software businesses a layer of protection even as AI disrupts the broader market.

"The cost of failure is very high, so again we think we're going to see more bifurcated outcomes," Jacobsen said.

"We have been continuing to lend into software, and as a result of the dynamics... spreads are widening, documentation is tightening, loan to values are going down. As a credit investor, that can be a very, very attractive dynamic."

Private credit has emerged as a major source of capital to the software sector, with alternative lenders' exposure growing to between 20% and 30% on average over the past five years, said Kevin Marchetti, chief investment officer and head of U.S. direct lending at Man Group.

Ares.

Marchetti said AI now represents a major test of the private credit thesis in software, comparable to the disruptive variables that have challenged other sectors in decades past.

He said Man Group's focus is increasingly on "old economy" businesses where AI is more likely to enhance operations than upend the business model.

These include "critical b2b healthcare services, distribution companies that are focused in and around serving Main Street, USA, where we fundamentally believe AI can be more of an enabler of those businesses and unlock value going forward, driving better efficiency and productivity for those companies," Marchetti told CNBC at SuperReturn on Wednesday.

"The software credit thesis is being tested, but I think there are still very good companies in that space, and it's just understanding how that will play out over the next three to five years."

Man Group.

John Toomey, CEO of HarbourVest Partners, said the software sector is still in the early stages of AI adoption, after the industry realized "almost overnight" that AI could threaten long-established software businesses.

While some investors fear a broader shakeout in SaaS, Toomey suggested that "sentiment seems to have overwashed fundamentals."

He said certain companies will inevitably face "very significant headwinds" — but others will adapt, turn it into a tailwind, and "deploy valuable end-services to their customers. "

"Make no mistake, AI is going to affect every business, every industry, every company, and the rate of adoption across each industry and company will increasingly determine their individual success in a competitive world," Toomey said.

"Just as we talk about in the economy, a K-shaped recovery, I think we'll have a K-shaped outcome in the software space."

He added: "The notion that our employees in any of our businesses are simply going to be vibe coding and creating their own solutions that will be better than what well-established enterprise or focused software businesses provide, I think, is very far-fetched."