How private equity’s big bet on software was derailed by AI
Dealmakers and lenders are facing a ‘Darwinian moment’ as digital services risk being made obsolete by new technologies
Antoine Gara and Eric Platt in New York
© FT montage; Getty ImagesOn paper, Thoma Bravo’s $2bn deal to buy a specialist software company for call centre workers last year was not especially noteworthy.
But in the months since, its acquisition of Verint has come to be seen as a bellwether moment.
The takeover negotiations unfolded over the course of a year in which the disruptive power of AI was coming into clearer view.
The US private equity group was forced to cut its acquisition price by about a third as Verint’s stock plunged amid rising investor concern about how novel AI algorithms might replace its services at a lower cost.
Then when banks that provided financing for Thoma Bravo’s purchase later went to sell the debt, few buyers emerged.
The banks, led by Santander, were able to offload just $1.5bn of the loan at a significant loss, leaving them holding a large stockpile of unsellable debt just as AI fears began to percolate on Wall Street.
The takeover’s messy completion was an early insight into what may be a defining story for financial markets in coming years.
Niche software companies such as Verint have been at the epicentre of a decade-long dealmaking boom — but the rise of AI technologies threatens to make them obsolete.
This month, investors’ anxiety was further pricked by the start-up Anthropic, which released a new AI model featuring tools to recreate software applications for legal and financial workers.
The release of the model, Claude Opus 4.6, caused many to question the business models of companies selling specialised software services to large and midsized corporations.
Could Claude be used to recreate valuable software businesses serving call centres, salespeople, human resources departments and a whole host of data analytics companies that had only recently been sold for billions, or even tens of billions of dollars?
This month the value of the world’s largest software companies like Salesforce and ServiceNow plunged by a fifth.
The investor angst quickly spread to finance as the shares of large private capital groups such as Blackstone, Ares, KKR and Blue Owl dropped sharply, signalling growing fears about their exposure to software investments.
Takeovers of software companies by private equity funds accounted for about 40 per cent of trillions of dollars in deal activity over the past decade by some estimates.
Such deals also represent nearly a third of lending in the fast-growing private credit industry.
“Software was the biggest area of private equity activity in the last decade,” one finance executive tells the FT.
“It is the largest exposure in every one of the largest private credit funds.”
To make matters worse, the apex of the software deal boom came at the end of a decade of ultra-low interest rates during which takeover valuations roughly doubled from 2012 to 2022.
But a combination of US interest rate rises precipitating a collapse in some tech valuations and the more recent threat of AI now raises serious questions about whether big investments in private software held by pension funds, endowments and retirees are at risk.
“The whole asset class flooded into software in the late 2010s.
Then people went nuts in 2020 and 2021,” says Daniel Rasmussen of investment firm Verdad Advisers.
“Fast forward to today and the growth that was forecast in 2021 didn’t materialise.
These assets were worth a lot less than what people paid . . . AI is the cherry on top.”
David Golub, who leads the $90bn private credit lender Golub Capital, recently told his investors that his industry was facing a “Darwinian moment”.
The rise of software in private equity can be traced to two once little-known specialist buyout firms, Vista Equity Partners and Thoma Bravo.
The leaders of both firms emerged as prolific acquirers in the wake of the 2000s dotcom bust as they acquired mid-sized software companies selling cyber security, or services to niche industries such as hospital systems, car dealerships or parking meter networks.
Many of their targets had been abandoned by public investors but came with steady growth and reliable customers who rarely pushed back on annual price increases.
Vista and Thoma earned large gains from their early funds, generally in excess of three times investors’ initial investment after fees.
Within the PE industry, the two firms’ returns trounced those of larger, established funds that participated in a mid-2000s bubble of mega-sized takeovers of companies that quickly collapsed.
But software deals remained a little-noticed corner of private markets until banks and specialised lenders such as private credit firms lubricated the marketplace with abundant credit.
Initially, lenders had been reluctant to finance software buyouts given that such companies have few physical assets and generally do not earn high profits by traditional accounting measures.
But several novel private credit firms such as Ares, Golub and Blue Owl took notice and invented specialised loans for software buyouts.
Lenders decided that software companies could increase revenues without adding overhead costs, meaning that new subscriptions could theoretically be converted to cash profits.
They also concluded that few companies cancelled their software licences given the potential disruption to their IT departments, making their growth easy to underwrite.
The post-crisis push by regulators to safeguard the banking sector by capping leverage at banks like Goldman and JPMorgan further played into the hands of non-bank lenders, who began to offer tailored loans based on companies’ annual subscription revenues instead of traditional measures like cash flows.
“Software contracts are better than first-lien debt,” Vista Equity founder Robert Smith told Forbes magazine in 2018, as the deal boom inflated.
“You realise a company will not pay the interest on their first lien until after they pay their software maintenance or subscription fee.”
Deals in the sector surged from just a few billion dollars annually before the crisis to hundreds of billions of dollars beginning in 2020 as rival PE firms attempted to replicate the success of Vista and Thoma.
The deal boom minted many new billionaires on Wall Street, including executives at lenders such as Ares, Blue Owl, HPS and Golub Capital.
But the biggest beneficiaries were Vista and Thoma, which saw their assets collectively rise to about $300bn from less than $3bn before the crisis.
Vista co-founder Smith is one of America’s wealthiest Black billionaires with a net worth of $10bn. Smith, who famously paid off the tuition of the graduating students of Morehouse College in 2019, the following year settled the biggest tax-evasion case in US history.
Orlando Bravo, the co-founder of Thoma Bravo, has done even better.
The Puerto Rican-born co-founder of the 220-person firm has steered its growth into an operation managing nearly $200bn in assets, greater than the private equity businesses of industry pioneers Apollo Global or Carlyle.
His net worth is nearly $13bn, making him one of the 100 richest people in America, according to Forbes magazine.
While Wall Street won big from the software dealmaking boom, it has left investors in the deals facing daunting questions on whether there will be any pay-off.
Many of the deals were done with leverage far above what public markets would normally accept.
Lenders bet on the massive equity cheques buyout firms were writing as a sign that private equity firms would support the businesses if they ran into trouble.
In the $10bn-plus acquisitions of property management software company RealPage and cyber security software company Proofpoint, for example, Thoma invested a staggering $15bn of its investors’ cash and raised more than $3bn in debt from banks led by Goldman Sachs for each of the takeovers.
When questioned about the valuations, Bravo said in an interview with the FT at the time it was “irresponsible, almost” to not continue investing.
Private lenders seemed to agree.
Blackstone financed Hellman & Friedman’s $10.2bn buyout of Zendesk in 2022 and Thoma Bravo’s $6.4bn takeover of customer service software company Medallia.
By 2023, surging interest rates quickly undermined many deals, crimping cash flows.
Many software companies also saw their growth slow significantly as corporate IT departments reined in spending.
Yet lenders’ enthusiasm for software deals continued to grow.
Money poured into their lending funds, creating even fiercer competition for deals.
In takeovers of companies such as Vista’s $8.4bn acquisition of task management software group Smartsheet and Thoma Bravo’s $8bn acquisition of corporate invoicing specialist Coupa Software, dozens of private lenders fought to finance the deals and bid against each other by offering lower and lower rates.
Some key figures on Wall Street, however, began to grow nervous of the deal frenzy as they watched the ever-increasing power of AI algorithms like Anthropic’s Claude.
Jonathan Gray, president of Blackstone, told the FT in October he believed Wall Street risked being “complacent” about the looming disruption coming from AI and elevated understanding of such risks across the group, which has $1.3tn in assets.
Apollo went a step further. Last year, it started cutting its exposure to software deals and even began shorting the debt of some companies it deemed exposed to AI risks, the FT reported in December.
“This is not just ‘nothing to see here’,” John Zito, the co-president of Apollo’s asset management business, says today.
“This is a logical repricing of terminal value, of forward growth, of heightened uncertainty,” he adds, of the recent sell-off.
Despite that downturn, the true scale of AI’s impact on the sector is yet to be felt.
Executives say software businesses — at least for the moment — remain healthy, and that they have been considering AI risks to software companies for years.
Ares and Blue Owl both noted last week that the earnings of the companies in the sector they lend to continued to grow in the fourth quarter.
The risk, rather, is three or four years away, when these companies try to refinance their debts.
Private credit funds have not yet taken significant writedowns on their loan books — but cracks have begun to show.
Investors are on edge after a BlackRock fund took a knife to its valuation of education software company Edmentum, sending the value of the fund to its lowest level since March 2020.
Investors will be closely watching how Blackstone’s flagship $82bn Bcred private credit fund — the biggest in the industry — marks the value of a loan it led for the acquisition of Medallia in the weeks ahead.
Blackstone had already cut the value of the loan in a sign of the stress on the company.
Tech loans account for about a quarter of Bcred’s assets, according to filings.
The shakiness of public debt markets has already prompted two groups to pull planned financings, with Thoma Bravo-owned contract management group Conga and Hg-owned web hosting company team.blue both postponing loan sales, according to people briefed on the matter.
A number of companies in Thoma Bravo’s portfolio plan to start hosting quarterly calls with their lenders when they report earnings, according to people briefed on the matter, with one person saying the firm hopes the calls will “calm down” antsy creditors.
Some of the firm’s portfolio companies already hold such calls.
UBS strategists warn that defaults in the private credit market should jump 2 percentage points this year “driven by restructured firms re-defaulting and rising AI-led disruption”.
The dealmakers whose software deals turned them into billionaires, like Orlando Bravo and Robert Smith, now face the challenge of proving the colossal investments into the industry can eventually be returned for profits.
It is a daunting task. Currently, funds raised by Thoma Bravo, Hellman & Friedman, Vista Equity, Insight Partners and other large software investors between 2019 and 2022 have returned a third or less of investors’ initial investment, meaning most of the industry’s largest deals have yet to be sold down, just as AI fears rise.
Orlando Bravo has remained optimistic about the sector’s future, arguing that AI will be a beneficiary of many niche companies that can leverage the technology to cut internal costs and build new products.
He also said that most of the value in niche software companies comes from their understanding of specific industries and how to win sales, or implement the product inside IT departments.
“The franchise value of many software companies is their domain expertise,” says Bravo, who adds that the firm’s largest bets generally continue to report strong growth.
“Companies can also adopt over $1tn in AI spending to uncover savings.”
He argues current customers of many software companies will not have the appetite to manage their own AI-built tools, but says there are large AI risks to companies selling analytic tools that are narrow in focus or are not market leaders.
“Instead of buying cheap, we bought the market leaders,” says Bravo, especially in areas like cyber security, which has accounted for half its recent deals, and where AI is a tailwind.
Smith of Vista Equity has told investors his firm has built an “agentic factory” so every portfolio company embeds new AI agents in their products that will increase the value of their services.
“The core features that make enterprise software mission-critical for businesses, and that we feel have made enterprise software one of the best performing asset classes over the past three decades, remain well intact,” Smith recently told his investors in a letter.
As software companies can successfully adopt AI tools, Vista believes there will be a large opportunity to earn outsized returns, similar to prior technological shifts like the move to the cloud, says a person briefed on the thinking.
Vista decline to comment.
Dealmakers and lenders believe that software companies providing “horizontal” services like customer support, data aggregation and analytics, or services to rules-based industries like law, accounting and transactions and claims processing, are most vulnerable to AI.
Niche services to industries like healthcare systems and banks, or those rooted in the everyday operations of companies, are more insulated, in their eyes.
Even if AI fears are overblown, convincing stockholders, other PE buyers, or rival software companies to now pay top dollar for software assets will be a tough task.
Public market valuations for software companies, once averaging over 20 times revenues, have fallen by more than two-thirds, meaning that even fast-growing companies are unlikely to have earned enough to offset waning investor enthusiasm.
Apollo chief executive Marc Rowan recently warned of software deals “you may not like the purchase price at which you entered because you get to now look at the same companies down 50 per cent to 70 per cent.”
Thoma Bravo, which had planned to sell or take some of its software companies public this year, is now putting some of those plans on hold, people familiar with its plans tell the FT.
With IPOs and asset sales on hold, PE groups are likely to see their building stockpile of unsold assets increase significantly, accentuating the industry’s broader struggles to return money to investors.
Bravo, who is sitting on tens of billions of dollars in unspent investor cash, told the FT he was planning a deal spree to take advantage of plunging valuations.
The firm is also preparing more deals like Verint, the customer service software company it acquired in 2025, as a way to engineer an exit from deals it struck in 2021 that have proved problematic.
In that takeover, Thoma merged Verint with a similar software company called Calabrio, which it had acquired for over $1bn in 2021.
The plan was to use the merger to build a far larger company that might be sellable in the future.
Thoma chose not to risk new investor cash and instead relied entirely on debt to acquire Verint, raising the question of whether lenders nursing heavy losses will retrench from making new loans.
One private capital executive calls the potential problem for such software deals “a pig in a python”.
“You overpaid during Covid and the cost of capital has gone up.
Now you have the double whammy of a big reset in valuations and the threat of AI,” the person says.
“We are having a moment of epiphany,” adds Rasmussen of Verdad Advisers.
“So much capital was sunk in at high multiples and everyone knew it was dumb at the time.
AI has put a mirror to people’s faces.”
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