"Software PE" death spiral at the center, the three major US PE firms continue to decline, KKR and Blue Owl conference calls acknowledge financial challenges

Amid concerns that AI will disrupt the software industry, major private equity firms in the U.S. are facing multiple challenges, including slowing fundraising, delayed asset exits, and increasing redemption pressures. Over the past decade, software assets have been a core focus of private equity investments, but this foundation is now shaking, threatening the industry’s growth logic and profitability models.

On February 5, during their earnings call, KKR and Blue Owl issued warnings about their financial outlook for 2026. KKR CFO Robert Lewin stated that if market conditions worsen, the company might delay some asset sales this year, which would reduce cash flow and lead to lower earnings in 2026.

Blue Owl disclosed that its credit fund redemption requests are rising, causing the firm to fall short of its long-term growth targets. It expects only “moderate” expense growth in 2026, a significant slowdown from the approximately 20% growth in assets and expenses in 2025.

On Thursday, the stock prices of the three major U.S. private equity giants all declined. Ares plunged over 11% to $121.87, KKR fell 5.5% to $99.19, and Blue Owl dropped 3.8% to $11.65. Since the beginning of the year, these three companies and their private equity peers, including Blackstone, have seen stock declines of over 15%, as investors reassess their growth prospects.

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

However, as the risk of AI replacing coding and data analysis functions increases, the stability logic of this “bond-like” asset is collapsing. According to Bloomberg Intelligence, data from Bloomberg shows that over the past four weeks, more than $17.7 billion in tech company loans have fallen into distress.

Analysts point out that this volatility is prompting private equity groups to consider delaying asset sales—this will impact their ability to generate hefty performance fees, while overall asset growth is also slowing due to investor withdrawals from some funds or delays in new investments.

Delays in asset exits and mounting redemption pressures

Market volatility is directly impacting the core business models of private equity firms. Delayed asset sales mean performance fee income is postponed, and redemption pressures threaten the continued growth of assets under management.

Robert Lewin said during the call that if conditions indeed worsen, delaying asset sales would result in profits being realized in subsequent years, but he emphasized that KKR remains “very optimistic” about the future.

Blue Owl CFO Alan Kirshenbaum stated that, with redemption requests rising, this private equity firm focused on technology will only see “moderate” expense growth in 2026.

Analysts believe this cautious guidance signals a significant slowdown. The company had set ambitious targets last year to manage over $500 billion in assets by 2029, with annual fee-related revenue exceeding $3.1 billion.

Despite the challenges, the three firms reported mixed Q4 results but saw substantial growth in assets under management. Ares recorded a record $34.4 billion in capital inflows over the three months ending December, pushing its assets under management to a new high of $623 billion.

KKR’s assets grew 17% year-over-year to $744 billion, with fee-related revenue up 15%, meeting expectations. However, adjusted net income was $1.12 per share. Performance was weighed down by two factors: the group refunded over $200 million in performance fees to its 2013 Japan fund clients, and asset sale gains fell short of analyst expectations.

Blue Owl raised $12 billion in capital commitments, and with its fund leverage increasing by $5.3 billion, total assets under management rose to $307 billion. Its $417 million fee-related revenue grew 22% year-over-year, surpassing Wall Street estimates, but the $187 billion in paid assets was slightly below Bloomberg survey analyst forecasts.

Software exposure becomes focus, executives seek to reassure

During the earnings call, analysts pressed KKR, Ares, and Blue Owl executives about their exposure to software company loans and whether AI might lead to higher default rates and significant losses.

Blue Owl CEO Marc Lipschultz took a firm stance, calling the idea that software companies are massively outdated “ridiculous,” and said the firm’s loan portfolio “mathematically cannot” see a surge in defaults.

“We haven’t seen significant losses. We haven’t seen deterioration in the portfolio,” he said, estimating that companies borrowing from Blue Owl grew their profits by 14% last quarter.

KKR Co-CEO Scott Nuttall said their deal team has been preparing for AI-related disruptions for years, selling off companies considered vulnerable. “Our level of concern is quite low because we’ve been thinking about this for the past few years,” Nuttall said, predicting that recent “dislocations create many important opportunities for us.”

Ares also attempted to clarify its total software exposure on Thursday. The company disclosed that, including its real estate and infrastructure debt businesses, software accounts for 9% of its private credit management assets. CEO Mike Arougheti stated that the non-performing loans in its software portfolio are “close to zero,” and due to AI risks, Ares’s growth outlook “remains unchanged.”

Private credit faces dual dislocation

As previously reported by Wallstreet.cn, this crisis is rapidly spreading from the stock market to the private credit sector. The private credit market is experiencing two simultaneous “dislocation” processes.

• First, the logic of lending to software companies has collapsed. Annual recurring revenue (ARR), once seen as providing stable, bond-like cash flows, proved that such predictable payments made lending reasonable even with negative free cash flow. But when business models suddenly face obsolescence risk, “stable annuities” become a binary bet.
• Second, the attractiveness of private credit itself is waning. As public market yields continue to catch up, the promised “liquidity premium” no longer seems as attractive. The so-called flight-to-quality—no daily mark-to-market, limited volatility—becomes harder to sell when defaults are now viewed as real risks.

Jeffrey Favuzza of Jefferies’ equity trading department described the current situation as “SaaS doomsday,” noting that the current trading style is a panic sell of “get me out of here at any cost,” with no signs of stabilization.

Analysts warn that as software equity valuations plummet, private credit institutions face balance sheet revaluations, which could lead to tighter lending conditions. This, in turn, could further squeeze the growth prospects of already struggling software companies, creating a dangerous negative feedback loop.

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