At the center of the "software-PE" death circle, the three US PE giants continue to plummet, KKR and Blue Owl will admit financial challenges during the phone call

# Source: Wall Street Insights

# By Dong Jing

Fears over AI disrupting the software industry have pushed major US private equity firms into a multi-faceted predicament of slowing fundraising, delayed exits and mounting redemption pressures. KKR warned that postponed asset sales would hit its 2026 earnings, while Blue Owl slashed its fee growth forecast from 20% to a "modest" level. The core cause lies in the collapse of the "bond-like" stability logic for SaaS assets and a rise in non-performing loan risks.

Amid fears of AI upending the software industry, titans of US private equity are grappling with a confluence of headwinds: slowing fundraising, delayed asset exits and surging redemption pressures. Software assets have been the core focus of private equity investments over the past decade, and now this foundation is shaking, threatening the industry’s growth logic and profit models.

On February 5, KKR and Blue Owl issued warnings about their 2026 financial outlook on their earnings calls. Robert Lewin, KKR’s Chief Financial Officer, stated that if market conditions deteriorate, the company may postpone some asset sales this year, which would reduce cash flow and drag down 2026 earnings.

Blue Owl, meanwhile, disclosed a rise in redemption requests for its credit funds, which prevented the company from meeting its long-term growth targets. It now expects only "modest" fee growth in 2026, a sharp slowdown from the roughly 20% growth in assets and fees seen in 2025.

Shares of the three US private equity giants tumbled across the board on Thursday. Ares plummeted more than 11% to $121.87, KKR fell 5.5% to $99.19, and Blue Owl dropped 3.8% to $11.65. Year to date, the share prices of these three firms and their private equity peers including Blackstone have all fallen by more than 15%, as investors reassess their growth prospects.

The core of this sell-off lies in a fundamental shift in market logic. Over the past decade, the Software-as-a-Service (SaaS) industry has been the most favored asset class for private credit, thanks to its stable recurring revenue (ARR).

However, as the risk of AI replacing code writing and data analysis functions mounts, this "bond-like" stability logic is falling apart. According to data from Bloomberg Intelligence cited in a Wall Street Insights article, more than $17.7 billion in loans to technology companies have slipped into non-performing territory over the past four weeks.

Analysts point out that such volatility has prompted private equity groups to consider delaying asset sales—a move that will hamper their ability to generate lucrative performance fees—while overall asset growth is slowing as investors withdraw capital from some funds or postpone new investments.

## Delayed Asset Exits and Escalating Redemption Pressures

Market volatility is directly hitting the core business model of private equity institutions. Delayed asset sales mean a pushback in performance fee income, while redemption pressures threaten the sustained growth of assets under management (AUM).

Robert Lewin noted on the earnings call that if conditions do deteriorate, delayed asset sales will result in profits being realized in subsequent years, but he emphasized that KKR is "very constructive" about the future.

Alan Kirshenbaum, Blue Owl’s CFO, said that amid rising redemption requests, the tech-focused private equity group will only achieve "modest" fee growth in 2026.

Analysts believe this cautious guidance marks a significant slowdown, as the company set an ambitious target last year to grow its AUM to over $500 billion and annual fee-related earnings to more than $3.1 billion by 2029.

Despite the challenges, the three institutions reported a mixed bag of fourth-quarter results but posted substantial AUM growth. Ares recorded a record $34.4 billion in capital inflows in the three months to December, pushing its AUM to a new high of $623 billion.

KKR’s AUM rose 17% year-on-year to $744 billion, with fee-related earnings up 15% in line with expectations, while adjusted net earnings came in at $1.12 per share. Its results were weighed down by two factors: the group refunded more than $200 million in performance fees to clients of its 2013 Japan fund, and gains from asset sales fell short of analysts’ expectations.

Blue Owl raised $12 billion in capital commitments, and a $5.3 billion increase in fund leverage lifted its total AUM to $307 billion. Its fee-related earnings of $417 million rose 22% year-on-year, beating Wall Street expectations, though its fee-paying assets of $187 billion came in slightly below analysts’ forecasts in a Bloomberg survey.

## Software Exposure Takes Center Stage, Executives Seek to Reassure Markets

On earnings calls, analysts bombarded executives at KKR, Ares and Blue Owl with questions about their loan exposure to software companies and whether AI would drive up default rates and trigger significant losses.

Marc Lipschultz, Blue Owl’s CEO, struck a tough stance, calling claims of widespread obsolescence for software companies "absurd" and stating that a surge in defaults in the group’s loan portfolio was "mathematically impossible".

"We are not seeing material losses. We are not seeing portfolio deterioration," he said, adding that companies borrowing from Blue Owl posted a 14% rise in profits in the last quarter.

Scott Nuttall, Co-CEO of KKR, said the firm’s deal teams have been preparing for AI-related disruption for years, selling off companies deemed vulnerable. "Our level of anxiety is quite low because we’ve been thinking about this for the last several years," Nuttall said, predicting that the recent "misalignment is creating many important opportunities for us".

Ares also sought to clarify its total software exposure on Thursday. The company disclosed that software accounts for 9% of its private credit AUM, including its real estate and infrastructure debt businesses. Mike Arougheti, CEO, said on the earnings call that non-performing loans in its software portfolio were "nearly zero" and that Ares’ growth prospects were "unchanged" due to AI risks.

## Private Credit Facing a Double Unwinding

As mentioned in a previous Wall Street Insights article, the crisis is spreading rapidly from the equity market to the private credit sector, which is experiencing two simultaneous "unwinding" processes.

First, the logic of lending to software companies has collapsed. Annual Recurring Revenue (ARR) was once seen as delivering stable, bond-like cash flows, and this predictable payment stream justified lending even when free cash flow was negative. But when business models suddenly face the risk of obsolescence, that "stable annuity" becomes a binary bet.

Second, the allure of private credit itself is fading. As public market yields keep rising, the promised "liquidity premium" looks less attractive. What’s more, the so-called insulation effect—no daily mark-to-market and limited volatility—is much harder to sell when defaults are now seen as a real risk.

Jeffrey Favuzza of Jefferies’ Equity Trading division described the current situation as "SaaS Armageddon", noting that the current trading sentiment is nothing short of a panic sell-off of the "get me out at any cost" variety, with no signs of a bottoming out yet.

Analysts say that as software equity valuations plummet, private credit institutions are under pressure to revalue their balance sheets, which in turn may lead to tighter credit conditions. This will, in turn, further squeeze growth space for software companies already facing an existential crisis, creating a dangerous negative feedback loop.

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