The strongest software businesses have defensible characteristics that extend well beyond their codebase.
Software stocks in early February experienced an abrupt and indiscriminate sell-off. Advances in AI code generation raised questions about the durability of the competitive moats of SaaS or software-as-a-service businesses.
This development matters for alternatives investors too because technology companies represent one of the larger sector exposures in both private equity and private credit portfolios. Investors reviewing sector composition charts like the one below in our Q1 Guide to Alternatives are now asking: what does this mean for private market allocations?
What triggered the sell-off?
A wave of product launches from major AI companies in early 2026 demonstrated that agentic tools could autonomously handle complex multi-step workflows: legal research, financial analysis, even writing software code. Software stocks, many trading at elevated multiples, sold off as investors reassessed the sustainability of these business models.
The S&P BDC index, which tracks publicly traded business development companies and is a bellwether for sentiment on private credit, dropped to its lowest value this year to date on February 5, coincident with the public market software sell-off as investors trimmed their exposure to private credit funds with software exposures.
Where does software figure in private markets?
Software has been a mainstay of private equity investment strategies, valued for its recurring revenue, high margins and perceived stickiness. In private credit, technology loans make up a significant share of portfolios.
The true exposure of private market funds to software is hard to pin down – classification methodologies vary across lenders, and a software company serving healthcare can be characterized as healthcare at one fund and technology in another, obscuring the actual concentration risk.
But software businesses are more than their code. The most aggressive bear case holds that AI-generated code will allow cheaper competitors to displace established software businesses. This view can sell short what makes enterprise software valuable.
The strongest software businesses have defensible characteristics that extend well beyond their codebase: deep customer relationships and established distribution networks, workflow integration that creates high switching costs and decades of proprietary data.
To lean into AI or diversify out of it?
This episode illustrates how interconnected public and private markets have become and underscores the importance of evaluating sector exposure across portfolios. It also highlights the value that active managers can bring in diligence and allocation decisions across the liquidity spectrum.
AI is among the most consequential technological shifts in a generation and much of the innovation is happening in private markets. Venture-backed companies are at the forefront of building the foundational models and tools. For investors seeking direct exposure to the AI opportunity, venture capital is where many of the future leaders will emerge.
For investors wary of AI disruption, investing in AI enablers such as private infrastructure is a way to gain differentiated exposure to the theme. Infrastructure funds which provide long-term power contracts to data centers and consumers alike can offer upside from AI's growth trajectory along with consistent income, lower volatility and less direct exposure to technology risk.