Private Credit and Software Exposure: What's Really Happening

Why This Matters Now

We've seen software stock prices fall sharply over the past month, followed by headlines about stress in private credit markets. Some business development companies (BDCs) are reporting higher problem loans, particularly those lending to technology companies, based on concerns of AI eating into company profitability. This has created broader uncertainty about private credit, even though the actual evidence of credit problems remains concentrated in specific, higher-risk segments of the market.

This note separates fact from fear, explains where genuine risk exists, and clarifies why well-structured private credit portfolios remain fundamentally different from the areas currently under pressure.

What's Actually Happening

Several distinct trends have recently emerged across private credit markets. Lenders that have focused on high-growth, unprofitable software companies have seen non-performing loans rise to 4-5%, compared to historical averages below 2% [1]. This has been most pronounced among companies that borrowed heavily during 2021-2022 when interest rates were near zero, and growth expectations were significantly higher. Some borrowers are now choosing to defer cash interest through payment-in-kind (PIK) arrangements, adding interest to loan principle balances rather than paying it in cash. While this preserves short-term liquidity for borrowers, it increases total debt levels and can signal underlying cash flow pressure [2].

Public markets have amplified these concerns. Publicly traded lenders and credit managers have seen their stock prices fall 15-25% since late 2024, even where their actual loan portfolios haven't shown significant deterioration [3]. Public market software valuations have compressed meaningfully from recent peaks, reflecting multiple contractions rather than broad‑based declines in revenue or profitability [4]. Importantly, most software companies haven't seen their revenues or profits decline; investors are simply willing to pay less for each dollar of earnings. This suggests investor anxiety is running ahead of actual credit losses, creating a gap between market sentiment and fundamental credit performance.

Where the Real Risk Is Concentrated

Current stress is not evenly distributed across private credit. Problems are concentrated in specific areas: loans to unprofitable growth companies, particularly venture debt and growth lending to pre-profitable software businesses designed for a zero-interest-rate environment. Companies that borrowed at peak valuations in 2021-2022 now face cash flow pressure as those loans mature in 2026-2027, creating potential refinancing challenges. Businesses selling non-essential software tools, particularly in marketing, sales enablement, or HR tech, have faced budget cuts and longer sales cycles as corporate buyers have become more selective [5,6].

Some newer lending structures combined aggressive economics without traditional protective features, such as quarterly financial reporting requirements and covenant protections, leaving lenders without early warning systems when businesses began to struggle. By contrast, traditional first-lien lending to profitable, established software businesses shows minimal stress, with fundamentally different risk profiles than the segments currently under pressure [7].

Why Structure Matters More Than Ever

When markets become volatile, the legal structure and terms of lending arrangements become critical. Historically, first‑lien lenders have experienced materially higher recovery outcomes than junior capital providers when businesses encounter stress. Traditional senior lenders require quarterly financial reporting and testing of leverage and cash flow metrics, enabling early intervention well before actual payment defaults occur. This creates multiple opportunities to address problems before they become critical.

Established institutional lenders maintain strict requirements around minimum profitability, recurring revenue characteristics, and business quality standards that create meaningful separation from the venture-backed or growth-stage companies currently experiencing difficulty. In the current rate environment, senior secured private credit has generally offered attractive income levels relative to traditional fixed income, reflecting higher base rates and credit risk compensation. While higher rates put pressure on borrowers, they also increase income for lenders holding floating-rate positions to compensate for the additional risk.

Bottom Line: Distinguishing Signal from Noise

The stress in private credit is real, but concentrated in specific areas. Well-structured lending to quality borrowers continues to perform as expected, while public market reactions appear to be pricing in worst-case scenarios that haven't materialized in carefully managed portfolios. Not all software companies face the same risks; essential business infrastructure and mission-critical systems operate very differently from optional tools that companies can easily cut during budget reviews.

The difference between experienced, disciplined lenders and newer market entrants has become increasingly clear. Rigorous borrower selection, protective loan terms, and proactive monitoring are proving their worth in real time. Even with current uncertainty, senior secured private credit continues to offer compelling income with priority claims and strong protections: advantages that differ compared to those of traditional fixed income.

Client Portfolio Exposure: A Practical Breakdown

Kinsted client portfolios gain exposure to private credit predominantly through institutional managers within diversified pooled vehicles. The North Haven Private Income Fund maintains 99.7% first-lien, senior-secured debt diversified across 38 industries, with its largest individual borrower representing approximately 0.03% of a client's portfolio. Ares Pathfinder Fund II holds primarily debt-oriented positions with the largest sector exposure to infrastructure, while North Haven Credit Partners III maintains approximately 72% first-lien debt positions. Even where software exposure exists within these funds, structural seniority, broad diversification, and modest position sizing materially limit portfolio-level downside risk.

We continue to monitor developments closely and maintain regular dialogue with all private credit managers in client portfolios. To date, the performance data we're seeing remains consistent with historical expectations for senior secured lending, and based on current information, we do not believe recent volatility necessarily indicates systemic issues across well‑structured institutional private credit portfolios, though conditions continue to evolve.

Sources

[1] Bloomberg, "Some BDCs See Non-Accruals Climb to Highest Levels Since 2020," January 2026

[2] Private Debt Investor, "PIK Activity Rises Across Middle Market Loans," January 2026

[3] S&P Capital IQ, publicly traded BDC and alternative credit manager performance data, Q4 2025 - Q1 2026

[4] FactSet, iShares Expanded Tech-Software Sector ETF (IGV) performance data

[5] Financial Times, "Venture Debt Faces Reckoning as Growth Companies Struggle to Refinance," December 2025

[6] The Wall Street Journal, "Private Credit Maturity Wall Looms for 2021-2022 Borrowers," January 2026

[7] Private Equity International, "Private Credit Default Rates Remain Contained Despite Headlines," February 2026

Disclosures: This commentary is provided for informational and educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security or investment strategy. Views expressed are current as of February 2026 and are subject to change. Private credit investments involve risks, including illiquidity and potential loss of capital. Past performance is not indicative of future results.

Regards,
Kinsted Wealth