Goldman Sachs analysts suggest that the market might be overlooking the potential for robust recoveries from defaults within the software sector. Contrary to prevailing pessimistic views, private credit — with its substantial "dry powder" — is poised to capitalize on potential financing disruptions and invest significantly in this area, particularly as legacy software models face challenges from artificial intelligence.
Leveraged finance investors have been heavily focused on the disruptive impact of AI on established software companies. Furthermore, many credit structures created during periods of high valuations and low interest rates may require restructuring. While a common market expectation is for low recovery rates in the event of a software default, Goldman strategists, led by Amanda Lynam, argue that this perspective is overly simplistic and negative.
Lynam and her team highlighted, "Despite its existing exposure, we see scope for private credit to deploy its sizable amount of dry powder in response to potential financing market dislocations." This comes at a time when the software sector is grappling with significant headwinds from AI-driven transformation.
Recent data from PitchBook Data underscores the slump, with only $17 billion in U.S. software buyouts announced or closed in the first five months of this year—a mere 17% of the 2022 peak. The industry faces persistent negative sentiment, including pressure on loans maturing in early 2026 and a substantial "maturity wall" of loans due in 2028.
However, not all areas of the software sector are equally vulnerable. Goldman strategists identify pockets of resilience, specifically in data infrastructure, cybersecurity, and what they term "good sticky" application software. They anticipate "more dispersion, not broad deterioration," as investors increasingly adopt a granular approach to evaluating the industry.
