The Risks of Private Credit's Software Exposure

Software exposure in credit markets differs significantly from equities, with approximately 80% of issuers being private companies concentrated in opaque sectors like Business Development Corporations (BDCs), leveraged loans, and CLOs. High concentration levels—reaching 25% in BDC portfolios—combined with a weak credit quality skew where half of borrowers are rated B- or lower, create refinancing risks amid potential AI disruption. Evaluating these risks is challenging because private firms lack public financial reporting, requiring individual re-underwriting to distinguish between AI beneficiaries and those at risk of obsolescence. While BDC liability spreads face volatility and valuation resets, the overall threat remains non-systemic due to low leverage levels compared to the 2008 financial crisis and a restrained credit cycle characterized by declining corporate debt-to-GDP ratios over the last five years. Strong fundamental balance sheets and below-trend M&A activity further insulate the broader economy from potential contagion within the software credit space.