What happened
Investors sold bonds and equity in Business Development Companies (BDCs), causing sharp price declines. These listed credit funds provide private debt to mid-market software firms. Market participants sold positions because AI threatens the cash flows of underlying software borrowers. The sell-off targets funds with high concentrations in enterprise software and services. This reversal ends a period of aggressive lending to the sector and follows a sharp rise in software-linked debt.
Why it matters
Fund managers and LPs face reduced liquidity as private credit valuations drop. Because AI automates core software functions, legacy software borrowers lose pricing power. Default risks increase, therefore BDCs must write down assets or restrict new lending. This pattern reinforces Apollo’s December move to short software and validates November’s warnings of AI overinvestment. Resulting credit tightening blocks mid-market software founders from accessing debt markets, forcing a shift toward equity or internal cash flow.
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