How lenders see the software industry amid AI concerns

Many equity investors have remained concerned about how artificial intelligence (AI) might disrupt existing software companies, limiting their growth and eroding their competitive strengths. But lenders to these companies view them differently, rather as mature companies with resilient revenue. 

The sector today is mostly structured around a cloud-based software as a service (SaaS) business model—meaning the companies license their technology to customers, usually on a per-user basis. This gives them some durable advantages. They have a large base of enterprise customers and sell products that are deeply embedded in their clients’ business processes, which helps to ensure recurring and predictable revenue. 

These characteristics generally have made software companies good credit risks. 

“As a lender, we have a different perspective than the equity market,” explains Ray Shu, senior managing director in Capital One’s technology, media and telecom banking group. “Software is a clear example of a sector that has had resilience across cycles, with revenues that hold up even during downturns.” 

Capital One’s technology, media, and telecom (TMT) team brings decades of combined industry experience. Over that time, software default rates have hovered around 1% across multiple cycles, including the early-2000s dot-com bust, the 2008 financial crisis, and recent equity market volatility.

Part of the story is that enterprise software companies, in particular, provide systems and services that are tightly integrated with mission-critical activities. Even as technology changes, software firms boast a granular knowledge of how their customers do business, creating a barrier to entry for any company hoping to steal the client—a significant competitive moat. 

Key lender metrics show the stability of enterprise-focused software companies and the enduring nature of their customer relationships. Their gross revenue retention, which tracks existing revenue separate from price increases or upgrades, will typically be in the mid-80% range, Shu says. Their net revenue retention, which reflects their ability to expand revenue in existing customer relationships, often falls in the upper 90% range.

Still, investor concerns about the longer-term outlook for software companies need to be taken seriously. The possibility that AI could make writing software faster and cheaper, undermining the SaaS business model and hurting growth prospects, is a legitimate worry.  

Investors reason that AI agents will eventually replace some software applications entirely. Existing software providers may lose pricing power and struggle to maintain the recurring per-seat revenue that has helped make their business strategy successful. Market advantages could shift if AI makes it easier for new competitors to enter or for existing customers to do more coding in-house. 

The release of more powerful AI coding agents based on the newest large language models (LLMs) provided the trigger for a steep selloff in software stocks in the first quarter of 2026. Shares of leading software makers such as Salesforce and Adobe plunged, as did many smaller SaaS companies. 

The iShares Expanded Tech-Software Sector ETF, which tracks many of these stocks, lost more than a third from its peak in September 2025. It has recently regained most of the lost ground, but the sector remains volatile. Investors increasingly are differentiating between companies that might be upended by AI and those that might benefit from incorporating AI tools into existing offerings.

To be sure, the potential for AI disruption impacts some areas of software sector lending. Where a company’s software is deeply embedded in the customer’s workflow, supported by proprietary data, and protected by meaningful switching costs, the revenue to support a loan is likely to be more secure. 

“At Capital One, we look for companies where that competitive moat is deep,” says Martin Mickus, managing director and head of Capital One’s technology, media and telecom investment research. “Sometimes a business that looks durable can suddenly be disintermediated. It’s happened in other industries, and it’s something we are watching.” 

The concerns about AI disruption that have emerged this year are translating into a more conservative approach in underwriting, particularly as it relates to expected revenue growth. Capital structures will likely result in lower leverage, with a higher emphasis on free cash flow generation.

Private credit has traditionally filled a role by providing more aggressive structures, including higher leverage and more flexibility in doc terms relative to banks. Now private credit is pulling back as well. As investors have become more wary of private credit portfolios that might be concentrated in software, some firms are reducing their exposure in the sector.

Capital One has typically avoided loans to riskier software firms—and the bank has not experienced credit losses in the sector in over a decade. Shu explains that Capital One favors mature companies and vertical software businesses that have domain expertise. Where a software company’s services touch on regulatory or compliance requirements or have payment integration, it becomes harder for customers to switch and makes revenue more resilient.

Even amid the concerns about AI disruption and longer-term growth, however, many near-term trends for software companies appear positive. Corporate IT budgets continue to grow, as companies boost spending on cloud infrastructure and cybersecurity—two areas that need increased resources as enterprises build their AI strategies. The mandate for continuous improvement of core technology systems hasn’t gone away either, though spending on non-essential software may get increased scrutiny. 

The software industry has demonstrated its strengths for decades. For lenders like Capital One, select borrowers in the sector will remain attractive even amid the disruption and change that new technology is bringing.

 

Learn more about how Capital One’s Technology, Media & Telecom Banking team can help move your business forward.