Many private equity sponsors are having to recalibrate exit strategies for software assets they planned to sell this year, as AI-driven market turbulence knocks their original plans off course.

The sharp drop in valuations for public comps, combined with uncertainty over the long-term viability of many software businesses, is prompting many GPs to slow exit activity while the dust settles, market participants told this news service.

This shift comes despite initial optimism about the software exit environment earlier in the year, following a surge in deal flow in 2025. North American software exit volume jumped 42% to USD 96.5bn in 2025, marking a recovery after two years of decline, according to Mergermarket data.

Source: Mergermarket, data correct as at 10-Mar-26. *The data only includes direct exits by financial sponsors.

The AI meltdown has already caused some notable casualties. On the larger end, Blackstone pulled back from an initial public offering of its mobile app marketing platform Liftoff, while Clear Street withdrew its IPO filing amid similar volatility. Hellman & Friedman is not expected to proceed with a potential IPO of Ultimate Kronos Group (UKG) until 2H26 at the earliest.

“Sponsors who bought at peak revenue multiples are generally waiting either for a modest rebound in public comps or for a successful repositioning of assets as AI‑enabled and mission‑critical enough to justify a premium to current market levels,” said Mario Ribera, a managing director in the TMT practice at AlixPartners.

With M&A and ECM exit paths narrowing, market participants expect an uptick in minority stake sales, secondary transactions, and dividend recapitalizations as alternative liquidity routes.

Stop and scale

In the meantime, sponsors face a key challenge: how to justify –or, in many cases, rebuild— valuation of their software portfolio companies.

One tactic gaining traction is to recast the AI narrative surrounding a given asset. “If you reframe yourself as an AI beneficiary, you can avoid being deemed an AI casualty,” said a managing partner at a capital advisory firm. “Markets may reward that framing, at least for now.”

To that end, sponsors may take a page out of the playbooks of large strategics such as Salesforce and Adobe, which have been embedding AI into their core platforms, said Neha Mishra, a managing director for technology investment banking at Portage Point.

Proofpoint, backed by Thoma Bravo since 2021, offers a case in point; the cybersecurity company has pursued a number of agentic AI-related acquisitions, most recently Acuvity, an AI enterprise security and governance provider.

As reported by this news service, Thoma Bravo may consider taking Proofpoint public in the near future, though there are no set plans to do so and any IPO would depend on market conditions.

Building scale to protect or improve valuations offers another pathway for sponsors. “The realistic exit path for many mid‑market names increasingly runs through consolidation, paired with AI‑driven value creation to strengthen defensibility and moats,” said AlixPartners’ Ribera.

The current slowdown also affords sponsors time to revisit operational improvements, an area that has often been overlooked in software firms.

In its 2025 global private equity report, Bain & Company found that many software buyouts over the previous five years fell well below projections for EBITDA or revenue growth. Over a 10-year period, margin expansion made up only 6% of value creation compared to 42% for multiple expansion and 52% for revenue growth.

Falling knife 

Compounding the challenge for sponsors, many software assets were acquired at frothy 2021 multiples.

“Multiples are already coming down, so no one wants to be catching the falling knife,” said a lender to sponsor-backed companies.

Often, deals done during the boom years were underwritten on multiples of annual recurring revenue (ARR) or aggressive forward projections rather than EBITDA, noted David Lewin, a lead senior partner in the technologies group at Novacap.

Many of these businesses now face balance sheet challenges, with some private credit market participants warning that sponsors holding highly leveraged assets that were underwritten on ARR multiples could now face a reckoning, amid challenges securing new financing.

“Nothing with any link to AI is getting done,” said one executive from a mid-market private credit shop, noting that the valuations of some assets have been roughly halved.

Private credit more broadly has significant exposure to the software sector. In a recent analysis of Business Development Company (BDC) data—seen as a proxy for the broader private credit industry—Debtwire estimates that tech- and software-related loans account for around 18% of gross loans at an industry level, with five BDCs having more than 30% exposure. The report noted Pay-in-Kind usage among BDCs rising 18%, which it said was “a sign of stress.”

Software stress was a key talking point at the iConnections Global Alts conference in Miami at the end of February, with some industry leaders pointing to loose underwriting as a potential cause for concern.

Katie Koch, president and CEO of TCW, told the conference that some of the behavior in private credit has resembled growth equity, with long duration, optimistic assumptions, and significant leverage. “These are capital structures that should be designed to withstand volatility, but because of some of the underwriting and the excess optimism, they’re not,” she said.

Across private credit, the average leverage ratio is around 4x-5x, while it is higher in software, Koch noted.

“We don’t believe in those multiples, because people said software is not cyclical,” she said. “The last thing everyone told us wasn’t cyclical was housing in 2008.”

Playing offense 

Against that background, private credit funds are being pushed to tighten underwriting on new deals and reduce incremental exposure to legacy software as a service (SaaS) models, as previously reported by Debtwire.  That poses a challenge for some private equity sponsors holding onto assets in this category.

Still, not everyone is playing defense. Several of the largest private equity firms see the recent volatility as an opportunity to deploy capital into dislocated assets.

“We are on offense,” Apollo CEO Marc Rowan said on the firm’s 4Q25 earnings call. “Software will be a very attractive sector, albeit not at the valuation levels and with the kind of underwriting that has been done previously.”

Middle market-focused investors also see a buying window. Novacap, which last month closed its Technologies Fund VII on nearly USD 3.8bn, plans to capitalize via M&A –both new platforms and add-ons for existing ones— of strong assets caught up in the broader software rout, Lewin said. Prior to the current market turmoil, Novacap completed the USD 1.9bn take-private of Integral Ad Science (IAS), a global digital ad verification and measurement platform, in December for a sub-10x EBITDA multiple.

The sponsor recognized that IAS had several traits that would make it more of an AI-beneficiary than a casualty, most notably the company’s technology stack and proprietary data. “Every business is going to face risk with AI,” Lewin explained. “Many of these software or tech-enabled businesses that have one angle of risk may have one, two, or three angles of opportunity that significantly outweigh that risk.”

Anuj Bahal, who leads the TMT deal advisory and strategy practice at KPMG, believes the market dislocation could open the door for more take-privates.

“If you fundamentally believe that the market has overreacted on how some of these names are being valued, but the application is a core and needed function, is still growing and profitable, then you’re in more of a modeling debate as you run the numbers,” he said.

Advisors have previously told Mergermarket that providers offering industry-specific workflow applications that handle complex data requirements will be the hardest to displace by AI. Other areas such as cybersecurity, govtech, and industrial technology tend to have clear AI augmentation pathways that can prop up valuations, as reported.

“If a company owns critical workflow systems, enterprise systems, or deep proprietary data assets, then there may be strategics willing to buy them to own that distribution or those customer relationships,” said the managing partner at the advisory firm.

Ribera from AlixPartners expects software M&A to increase by as much as 40% year-over-year as more sponsors use this valuation reset to roll up sub-scale businesses.

“In that context, sponsors will prioritize tuck‑ins where they can underwrite multiple expansion through synergy, economies of scale, and AI‑driven margin improvement rather than relying on a sector‑wide rerating,” he said.