February 20, 2026
Private equity’s software trade was supposed to be one of the cleaner stories in finance: recurring revenue, sticky customers and growth across major industries. That simplicity is exactly what made it dangerous.
When an entire industry crowds into the same thesis, the risk is no longer just whether one company misses its numbers. The risk is that everyone owns the same assumption at the same time. Apollo’s David Sambur put it bluntly, asking whether it was a red flag that 30% or 40% of buyouts were in software. In hindsight, he argued, it was.
The issue is not that software suddenly stopped mattering. The issue is that the old underwriting model may no longer deserve the same valuation. Higher interest rates changed the math, while generative AI changed the strategic question. If new AI tools can weaken the position of incumbent software-as-a-service companies, then recurring revenue is not as comforting as it once looked.
Valuation Is the First Casualty
Software deals were done at rich prices, including a record $348 billion of private equity software activity in 2021. That matters because private equity returns depend heavily on both entry price and exit price. If firms bought at peak valuations and now have to sell into a market that is rethinking software growth, the gap can be painful.
Many pandemic-era software investments are reaching the end of a typical holding period. That creates a basic problem: firms may need exits, but buyers may not be willing to pay the multiples those exits require. If sales disappoint, the consequences can spill beyond one portfolio company. Lower realizations can hurt fundraising and reduce firms’ ability to pursue new deals.
This is why Sambur described the sector as needing a valuation reset. A reset is not just a temporary stock-price move. It means investors are reconsidering the durability of the economic model, the realistic growth rate and the proper multiple for software companies in an AI-driven market.
AI Turns Moats Into Questions
Software was attractive because customer relationships looked durable. SaaS businesses often had reliable revenue streams from loyal clients. But AI introduces a more uncomfortable question: what if the product layer becomes easier to replace, automate or compress?
That fear has already hit public markets. Software stocks have faced selling pressure as investors worry that AI tools from companies such as Anthropic could render some incumbent SaaS providers obsolete. Listed buyout firms have also felt the pressure, with an S&P index of those firms falling around 8% since the start of 2026.
The deeper point is that technological disruption does not only affect venture-backed startups. It can damage mature, cash-generating assets too. In private equity, that matters because leverage magnifies mistakes. A company can still be real, profitable and useful, yet still be a poor investment if it was bought at the wrong price with the wrong assumptions.
Apollo’s Message Is Risk Management
Apollo says it has zero software exposure in its private equity business and less than 2% across the full firm. Its leaders framed that decision as an investing and risk management choice, not a blanket rejection of the entire software sector.
That distinction is important. The argument is not that every software company is doomed. There will be winners and losers. The argument is that the reward was not attractive enough for the risk inside a levered equity fund.
That is a more serious critique than a simple bearish call. It says the problem was not software itself, but the industry’s confidence in paying premium prices for a consensus theme. Groupthink can feel safe because everyone else sees the same thing. In investing, that is often when the downside is most underappreciated.
What Candidates Should Notice
For investment banking and private equity candidates, this is a useful reminder that sector knowledge is not just about knowing the buzzwords. SaaS, AI, recurring revenue and valuation multiples all connect to the same practical questions:
- What assumptions support the entry multiple?
- What could cause the exit multiple to compress?
- How does leverage change the risk profile?
- Is the company’s revenue truly durable, or only historically durable?
- What happens if the market stops rewarding the sector narrative?
Good finance judgment requires separating a good business from a good investment. Software may still produce outstanding companies, but private equity is now being forced to confront whether it paid too much for too many of them.
The lesson is simple: when capital crowds into one sector, discipline matters more, not less. The most dangerous deals are often the ones that look obvious at the time.