The rapid rise of artificial intelligence is starting to show cracks in the software sector. Software company shares came under significant pressure last week and are now trading around 30% below their peak at the end of 2025. Much of this decline occurred recently, indicating a sudden revaluation of business models long considered relatively predictable.
According to Mark Dowding, CIO, Fixed Income at RBC BlueBay Asset Management, doubts about the sustainability of these models are growing as AI makes it increasingly easier for clients to develop software themselves. "The rise of AI doesn't automatically mean that existing software vendors benefit," says Dowding. "On the contrary, it actually makes future revenues more difficult to predict." This uncertainty is also reflected in market positioning: short positions in software are at their highest level in two years.
It's striking that the risks aren't limited to listed equities. In private markets, exposure to software is significant. Many private debt credit funds have up to 30% of their portfolios in the sector, while these strategies leave little room for rapid course correction. "In parts of the private markets, you're locked in when the environment changes," says Dowding. "That makes technological disruption even more challenging there."
This tension is now becoming apparent in listed private credit funds, which trade at discounts of 20% to 30% to their intrinsic value. For Mark Dowding, this is a logical consequence of the high software exposure in parts of the private debt market. "Precisely where investors are locked in, the market is now starting to anticipate the risk of overly optimistic valuations," he says.
