An executive from Apollo Global Management has stated that the private equity industry is facing a prolonged period of adjustment regarding its software investments, attributing this to the sector's failure to promptly recognize how new technologies, like artificial intelligence, would disrupt what has long been one of its most favored investment areas. David Sambur, a Partner and Co-Head of Private Equity at Apollo, remarked in an interview that the signs of an impending multi-vehicle collision on the software investment highway were apparent as early as 2022, yet awareness is only dawning now. Sambur pointed out that the convergence of OpenAI's ChatGPT launch approximately three years ago and a rising interest rate environment served as the primary catalysts for the recent sell-off in technology stocks that has unsettled markets in recent weeks. Wall Street has been actively offloading software stocks, driven by investor concerns that a new generation of AI tools from companies like Anthropic could eventually render existing Software-as-a-Service (SaaS) providers obsolete. Earlier, Anthropic introduced a new feature to its AI model capable of scanning codebases for security vulnerabilities. Following this announcement, shares of CrowdStrike and Cloudflare each fell more than 7%. The private equity industry holds significant exposure to the SaaS sector, largely due to the appeal of these software companies' stable, predictable revenue models, which are underpinned by loyal customer bases. Over recent years, private equity firms have deployed substantial capital into this area, with investment reaching a record $348 billion in 2021. Sambur questioned whether the industry fell into groupthink, noting that 30% to 40% of merger and acquisition deals were concentrated in software—a significant red flag in hindsight. He suggested that when looking back, this period will be seen as a failure in risk management. As many software investments made during the pandemic approach the end of the typical private equity holding period, concerns are mounting about the ability of these firms to divest assets at desirable prices and achieve targeted returns. This situation could also impair fundraising efforts for private equity firms and weaken their capacity to pursue new transactions. Sambur indicated that the industry needs to prepare for a "much-needed reset" in valuations as investors reassess the economic models and future growth rates of software companies. He noted that the full impact will become clear over time when these businesses are actually sold. As of December 31, Apollo managed approximately $938 billion in assets. According to Sambur, the firm's private equity business has "zero exposure" to the software sector, with the group's overall exposure being less than 2%. Despite this defensive positioning, Apollo's stock price has still been affected by broader industry pressures, declining over 14% year-to-date. In a letter to clients this week, Apollo's private equity leadership, including Sambur, mentioned that the decision to avoid the software sector was driven by investment and risk management considerations, rather than a blanket dismissal of the entire industry. They wrote that while there will be winners and losers within software, "within levered equity funds, we did not believe the potential returns compensated for the risks." The letter also stated that Apollo continues to seek new opportunities arising from market turbulence. Other prominent buyout firms have recently moved to reassure their investors, emphasizing that their exposure to the software sector is limited or manageable. Reports indicate that Thoma Bravo and Vista Equity Partners have held meetings with investors to alleviate concerns.