Ares Capital Confronts Credit Risk from AI Disruption of Enterprise Software Borrowers

Ares Capital confronts rising credit risk as AI advances unsettle its software borrowers

AI-driven tools intensify pressure on enterprise software firms that make up a significant slice of Ares Capital’s lending market, raising fresh concerns about borrower cash flows, covenant strain and the liquidity of private loan structures. The launch of new models by Anthropic is accelerating fears that artificial intelligence can perform complex professional tasks previously monetized by incumbent software vendors, a shift market participants say could undercut recurring revenue and margin profiles relied on by private lenders.

Private credit lenders such as Ares Capital have increased exposure to enterprise software since 2020, with PitchBook data showing software ranks as one of the largest sectors by deal count for U.S. business development companies. That concentration matters because many of the largest unitranche and other private loans backing leveraged buyouts are tied to software targets. Analysts warn that if AI adoption outpaces borrowers’ ability to adapt, weakened cash generation can quickly trigger covenant tests, loan extensions and potential defaults in an asset class that is inherently illiquid.

Industry observers and practitioners say the combination of concentrated exposure and illiquid loan structures amplifies the risk for managers and their BDCs. Jeffrey C. Hooke of Johns Hopkins and others note that liquidity shortfalls and widespread loan extensions already strain portions of private credit portfolios, and the AI development represents an additional shock on fragile footing. Lenders face questions about valuation, covenant robustness and recovery prospects for unitranche loans should software borrowers deteriorate.

Lenders respond by stepping up monitoring and stress testing of software borrowers, according to market sources. Risk teams are revisiting covenant packages, pushing for stronger protections in new deals and conducting scenario analysis that factors in faster-than-expected AI disruption to sales and margins.

Market analysts and some banks warn of broader implications for the roughly $3 trillion private credit market if disruption is severe. UBS projects that in an aggressive scenario U.S. private credit default rates could rise markedly, putting pressure on managers, BDC income streams and investors who rely on private credit for yield. Industry participants say the near-term focus is on borrower remediation, tightening underwriting and increasing transparency to mitigate contagion across private credit portfolios.