For a while (2018-2022) it was hot to buy up software companies that dominated a single niche and jack up prices. The bet was that since software is such a 0-1 business that they would have great moats and have strong pricing power. My father-in-law is blind and used to use JAWS until it got bought up by a private equity firm (Vispero) which tried to dominate the software accessibility market and jacked up the prices to annual subscriptions. He's a electrical engineer so he was comfortable switching to free software NVDA, but a lot of people paid up.
Now with LLM's that business model is in shambles and the finance side of it is less attractive with interest rates so high. I suspect that this is actually driving the software engineer hiring slow-down, because these companies were actually doing most of the employing of software engineers, much more than the big tech companies.
I'm not a SWE, (I'm a data engineer) but this jives with what I saw while looking for work. I'm not a particularly good DE, so I was out there for 18 months. There were still plenty of listings but not many of them were in "tech" companies in the traditional sense. Part of this was leaving a tech hub for what is very much not one, but the biggest issue that I found in landing work was that I was now competing for relatively boring $100k+ jobs with guys who were working $200k+ jobs in 2020 - 2023. The 3 - 6 "tech" orgs that used to employ these folks regionally just aren't really hiring that much.
As I understand it the situation is much worse than that, the existing debt is floating rate so in some situations can put previously sustainable companies into the red. This of course also affects their ability to refinance so it can spiral from there unless they take drastic measures (which still might not be enough).
> Yeah, it's rarely not fixed, and a lot was tied to the historic expectation of the investment being at most ~5-7 years.
You've got it reversed, the debt BDC's and PC firms write is usually floating rate based off SOFR. That' s why they do so well in rising rate environments.
Now they often borrow at fixed rates by issuing bonds or preferred shares that pay a fixed rate so falling rates has to opposite effect on them.
My understanding is that almost all deals are built on floating rate debt, with some hedging. I don't work in PE though, maybe someone here knows the market in more detail.
I was thinking we should have our own internal saas-pocalypse where I work, or at least threaten one to our vendors.
It used to be that vendors could tie their cost to the value they provide, but now their cost is more correlated to the token spend to reverse engineer and re-implement them (using appropriate clean room controls etc). If their cost goes to far above the AI-driven re-write, they're more likely to get jettisoned (absent some other moat not included purely in the technology).
I'm sure we can all think of products that charge a fair whack in license fees, but would not be massively difficult to re-implement (or at least for the subset of features actually used).
On some level, yes, though when I choose a saas product, what I'm really choosing is not a basket of features, but rather someone else to be worrying about scaling, monitoring, security patches, uptime, etc.
Like in theory your agents can build all that too, but all the ancillary bits benefit a lot from being spread across a pool of users with different time zones, release cycles, whatever.
At the same time we have to value domain experience when it is a cornerstone. Ive worked for "middleman" companies that at face value seem superfluous only to realize we handled relationships or bureaucracies much more effectively then our clients could and thereby provided concrete value well beyond our cost.
Many organizations just want to diffuse responsibility away from themselves and will gladly sign a contract to do so. Paying a vendor is infinitely more affordable than the risk of trying to bring a vendors' core competency in-house.
I think the SaaS-pocalypse is going to surface more from new AI-first SaaS companies entering the market and undercutting incumbents in a way that's difficult to compete with.
Just use a vendor intelligence service to find out what others are paying to cram down what they're trying to charge you. Lots of competitors in this space, you provide them contract details, they provide a report on how and where to push.
One interesting knock on from the hyperscaler growth we've seen is that the Mag7 have issued so much debt that they are crowding out other companies who would otherwise have no trouble issuing debt.
The private equity and private credit crowd is one of these groups that are currently running into this issue.
There is no way a growing company($15M to $500M in yearly sales is the sweet spot for these private credit companies) can compete with Google on debt terms so they have to raise their rates to compete suddenly, not because of all rates rising but strictly because we've just seen a huge debt issuance from some very solid credit companies.
We haven't seen a shock like this in 20+ years I've followed the credit market where a small group of companies issue so much high quality debt in such a short period of time, note there is also a lot of less high quality debt issued in this same time:)
So much has been issued that credit funds have run out of appetite to acquire Lowe middle market debt at their current spreads. This is just the way markets work so no one is crying in the casino but it is a big shock to the credit markets.
heck there was concern that the US government may have trouble issuing 5-10Y debt at rates they are used to because of the amount of GOOG, META,etc debt that is available at better terms.
Its a wrinkle to the markets that no one really predicted as a knock on effect of AI's growth.
This is all the back drop for BDC(Business Development Companies) and other private credit issuers who normally loan money for 5-7 year terms.
Those cheap 2021 loans to these small private companies are now coming due into this market with the additional head wind that the largest single sector that issued debt was venture backed software companies, who now face the head winds of the macro factors described above and the additional factor of AI commoditizing alot of hte software that these companies are building.
Private credit and equity are going to have a rough couple of years.
Things to watch out for are lack of IPO's and exist from venture/PE backed companies and a proliferation of continuation funds that kick the can down the road.
On the plus side, its a great time to be a credit trader, but not necessarily a credit issuer:)
And it is bleeding over into equities as well. Between the SPCX and Anthropic IPO, and META approving an ATM offering, feels like we are seeing a really big strain on liquidity across the board.
Maybe a naive perspective but I honestly would have thought that a larger credit market on high quality debt would actually enable a larger credit market on low quality debt. In other words the former would effectively expand money supply more reliably and therefore enable creditors to also support more speculative bets. Admittedly if there are higher ROI speculative bets to go after then maybe those just get pushed down the priority line. But I'm surprised that they're in direct competition with the high quality stuff exactly.
Something tells me not all of that debt is going to turn out quite as high quality as it appeared at the time of issuance.
The mere success of “AI” won’t be sufficient to repay those loans. Many of them only make sense in a world where AI is wildly transformative and profitably successful.
Yes. And bear in mind than default create inflation naturally. When it's productive companies that default, the effect is increased. If PE can't roll their debt, i fear it will increase the dollar inflation really fast, which will have second order effect.
Also since idiots predicted hyperinflation 5-4 years ago and other idiots believed them, we're still before the 'bust' of precious metal prices (We're at the point where people invest in opening new gold/silver mines), which means it will be harded to edge against inflation than it used to be.
The Fed has been trying to hit its 2% inflation target (which is arguably unrealistic as the neutral rate but that's another topic) for half a decade and can't hit it. I suppose the question is: What do you consider hyperinflation objectively?
Due to structural demographics and other factors (exhausting institutional buyers of sovereign debt no longer required to buy and hold it at below market pricing, and sovereigns now having to go sell debt into a price sensitive debt market), we've gone from a capital surplus to a capital shortage, and this will likely continue long into the future due to demographics (working age population shrinks, wages get pushed up, and a whole lot of debt that needs to get refinanced at current and forward curve interest rates [real estate, private equity, sovereign debt, etc]).
If you can forecast the cost of money curve, you can forecast "who has been swimming naked when the tide goes out" based on their debt load and future cost of debt, and therefore when the economics turn against what the fundamentals can support.
For someone like me who doesn't really understand this area, what does it mean for those big VC-backed or private equity-backed firms that have bought others, and have debt?
Are they forced to sell? To raise new capital? To increase value somehow (?) to show the debt can be met? I don't know enough to even know what questions to ask. Are they in trouble, I guess, as in, suppose they had to sell to cover debt, in this market, would anyone be around to buy?
There is some variety, but a very common model in Private Equity is to acquire an asset (a company), and fund that acquisition through either equity or debt.
The ability to purchase often comes in through either Private fund investments or via Debt.
* Private funds are most often drawdown funds (Private equity funds, VC Funds, Real Estate Funds, etc.). These are managed funds not available on public markets, typically require a substantial commitment of funds, and generally in return these investors can expect a significant return on their capital.
* Debt was a very popular way to finance these purchases as well when interests rate were lower, and you expect to sell the asset/company before the debt comes due. Basically cheap money made this feasible/possible.
The expectations are typically 5-10 years for both of these funding models; with private funds, they expect to run for X years, long enough to acquire the assets, clean them up, and resell them at a profit. For debt, the expectation was to sell before the debt came due, along the same timeline.
So that's the backdrop.
The primary concern here is around investments in tech and SaaS companies impacting both models. SaaS has contracted quite a bit with pressure from AI and valuations are lower.
The article is focused on the debt financed path; PE hasn't been able to sell companies as quickly as they would like or at a price they would like, so they are sitting on the books. And for companies purchased using a combination or private funds, they have companies they can't unload for the price they would like. The funds that are in this state where they cannot sell remaining portfolio companies without realizing losses are called zombie funds.
So traditional Venture firms are not part of this (1). VC buys equity in their start-ups, not debt, so interest rates aren't a direct concern of theirs. And VC firms generally do not borrow, they raise investment funds of investors money and because it is high risk, generally speaking no one lends money to these funds.
Private Equity firms on the other hand do generally take on a lot of debt- they have their own money but they borrow even more (2) and use that amount of money to buy out the current owners of a company. Basically they borrow to turn a steady stream of revenue into the future (an existing software company that is profitable) into a big pile of cash today for the current owners. And then they need to pay off that borrowing over time, from the steady stream of revenue that the software company generates. And if they are wrong about the size of the steady stream of revenue, they basically declare bankruptcy and the people who loaned the money (banks but also pension firms etc.) now run the company.
1: The way that VC changes is that the rising interest rates mean that the returns to safe investments are higher, so in order to attract new capital VC firms have to promise even higher returns as well.
2: They borrow money to get higher returns- if you have 5 dollars in a stock and it goes up 20% you have 6 dollars. If you have 5 dollars and borrow 5 dollars and invest it in a stock that goes up 20% you have 7 dollars after you pay back the loan. The catch is, if the stock instead goes down by 20%, after you pay back the loan you only have 3 dollars. (And if the stock goes down 50% you are wiped out.) But PE firms are confident that their investments will always be winners, so they take out loans like that.
This is the PE playbook backfiring. Buy the company, load it up with debt, pillage every dollar that can be found, then try to pass it off to some unsuspecting schmuck by convincing them the company still has value. That works unless interest rates skyrocket mid flight and you have to renew the debt, then you’re royally f$&!ked.
If these PE firms are truly the business geniuses they claim to just run the companies they bought well and weather the storm. However I think we’re about to find out real quick who is actually good at business and who was just shuffling cheap leveraged money around trying to look important and smart.
Which in some cases means the general public via IPO.
I think we’re about to find out real quick who is actually good at business and who was just shuffling cheap leveraged money around trying to look important and smart.
> Which in some cases means the general public via IPO.
You're talking more about VC tech firms.
These distressed PE targets loaded with debt are often sold to another private buyer, or if they are taken public (sometimes not for the first time) they are much too small or have too bad of financials to be in the indexes that regular people are buying.
I think ai leads to an accounting error in software assets. So if you book keept software at x amount of goodwill that must be written down. Reason ai can clone the software fast so the value is not what is book keeped.
For a while (2018-2022) it was hot to buy up software companies that dominated a single niche and jack up prices. The bet was that since software is such a 0-1 business that they would have great moats and have strong pricing power. My father-in-law is blind and used to use JAWS until it got bought up by a private equity firm (Vispero) which tried to dominate the software accessibility market and jacked up the prices to annual subscriptions. He's a electrical engineer so he was comfortable switching to free software NVDA, but a lot of people paid up.
Now with LLM's that business model is in shambles and the finance side of it is less attractive with interest rates so high. I suspect that this is actually driving the software engineer hiring slow-down, because these companies were actually doing most of the employing of software engineers, much more than the big tech companies.
I'm not a SWE, (I'm a data engineer) but this jives with what I saw while looking for work. I'm not a particularly good DE, so I was out there for 18 months. There were still plenty of listings but not many of them were in "tech" companies in the traditional sense. Part of this was leaving a tech hub for what is very much not one, but the biggest issue that I found in landing work was that I was now competing for relatively boring $100k+ jobs with guys who were working $200k+ jobs in 2020 - 2023. The 3 - 6 "tech" orgs that used to employ these folks regionally just aren't really hiring that much.
As I understand it the situation is much worse than that, the existing debt is floating rate so in some situations can put previously sustainable companies into the red. This of course also affects their ability to refinance so it can spiral from there unless they take drastic measures (which still might not be enough).
I think a lot is fixed, but for a fairly short term. So you have roll the debt over (at the new market rates) every 5 to 10 years.
Yeah, it's rarely not fixed, and a lot was tied to the historic expectation of the investment being at most ~5-7 years.
Closely related, you can read about the PE Zombie funds that cover a lot of this debt.
> Yeah, it's rarely not fixed, and a lot was tied to the historic expectation of the investment being at most ~5-7 years.
You've got it reversed, the debt BDC's and PC firms write is usually floating rate based off SOFR. That' s why they do so well in rising rate environments.
Now they often borrow at fixed rates by issuing bonds or preferred shares that pay a fixed rate so falling rates has to opposite effect on them.
My understanding is that almost all deals are built on floating rate debt, with some hedging. I don't work in PE though, maybe someone here knows the market in more detail.
I was thinking we should have our own internal saas-pocalypse where I work, or at least threaten one to our vendors.
It used to be that vendors could tie their cost to the value they provide, but now their cost is more correlated to the token spend to reverse engineer and re-implement them (using appropriate clean room controls etc). If their cost goes to far above the AI-driven re-write, they're more likely to get jettisoned (absent some other moat not included purely in the technology).
I'm sure we can all think of products that charge a fair whack in license fees, but would not be massively difficult to re-implement (or at least for the subset of features actually used).
On some level, yes, though when I choose a saas product, what I'm really choosing is not a basket of features, but rather someone else to be worrying about scaling, monitoring, security patches, uptime, etc.
Like in theory your agents can build all that too, but all the ancillary bits benefit a lot from being spread across a pool of users with different time zones, release cycles, whatever.
At the same time we have to value domain experience when it is a cornerstone. Ive worked for "middleman" companies that at face value seem superfluous only to realize we handled relationships or bureaucracies much more effectively then our clients could and thereby provided concrete value well beyond our cost.
Many organizations just want to diffuse responsibility away from themselves and will gladly sign a contract to do so. Paying a vendor is infinitely more affordable than the risk of trying to bring a vendors' core competency in-house.
I think the SaaS-pocalypse is going to surface more from new AI-first SaaS companies entering the market and undercutting incumbents in a way that's difficult to compete with.
Just use a vendor intelligence service to find out what others are paying to cram down what they're trying to charge you. Lots of competitors in this space, you provide them contract details, they provide a report on how and where to push.
One interesting knock on from the hyperscaler growth we've seen is that the Mag7 have issued so much debt that they are crowding out other companies who would otherwise have no trouble issuing debt.
The private equity and private credit crowd is one of these groups that are currently running into this issue.
There is no way a growing company($15M to $500M in yearly sales is the sweet spot for these private credit companies) can compete with Google on debt terms so they have to raise their rates to compete suddenly, not because of all rates rising but strictly because we've just seen a huge debt issuance from some very solid credit companies.
We haven't seen a shock like this in 20+ years I've followed the credit market where a small group of companies issue so much high quality debt in such a short period of time, note there is also a lot of less high quality debt issued in this same time:)
So much has been issued that credit funds have run out of appetite to acquire Lowe middle market debt at their current spreads. This is just the way markets work so no one is crying in the casino but it is a big shock to the credit markets.
heck there was concern that the US government may have trouble issuing 5-10Y debt at rates they are used to because of the amount of GOOG, META,etc debt that is available at better terms.
Its a wrinkle to the markets that no one really predicted as a knock on effect of AI's growth.
This is all the back drop for BDC(Business Development Companies) and other private credit issuers who normally loan money for 5-7 year terms.
Those cheap 2021 loans to these small private companies are now coming due into this market with the additional head wind that the largest single sector that issued debt was venture backed software companies, who now face the head winds of the macro factors described above and the additional factor of AI commoditizing alot of hte software that these companies are building.
Private credit and equity are going to have a rough couple of years.
Things to watch out for are lack of IPO's and exist from venture/PE backed companies and a proliferation of continuation funds that kick the can down the road.
On the plus side, its a great time to be a credit trader, but not necessarily a credit issuer:)
And it is bleeding over into equities as well. Between the SPCX and Anthropic IPO, and META approving an ATM offering, feels like we are seeing a really big strain on liquidity across the board.
Maybe a naive perspective but I honestly would have thought that a larger credit market on high quality debt would actually enable a larger credit market on low quality debt. In other words the former would effectively expand money supply more reliably and therefore enable creditors to also support more speculative bets. Admittedly if there are higher ROI speculative bets to go after then maybe those just get pushed down the priority line. But I'm surprised that they're in direct competition with the high quality stuff exactly.
Something tells me not all of that debt is going to turn out quite as high quality as it appeared at the time of issuance.
The mere success of “AI” won’t be sufficient to repay those loans. Many of them only make sense in a world where AI is wildly transformative and profitably successful.
Yes. And bear in mind than default create inflation naturally. When it's productive companies that default, the effect is increased. If PE can't roll their debt, i fear it will increase the dollar inflation really fast, which will have second order effect.
Also since idiots predicted hyperinflation 5-4 years ago and other idiots believed them, we're still before the 'bust' of precious metal prices (We're at the point where people invest in opening new gold/silver mines), which means it will be harded to edge against inflation than it used to be.
> "Predicted hyperinflation"
The Fed has been trying to hit its 2% inflation target (which is arguably unrealistic as the neutral rate but that's another topic) for half a decade and can't hit it. I suppose the question is: What do you consider hyperinflation objectively?
https://www.stlouisfed.org/on-the-economy/2025/oct/is-us-abo...
Due to structural demographics and other factors (exhausting institutional buyers of sovereign debt no longer required to buy and hold it at below market pricing, and sovereigns now having to go sell debt into a price sensitive debt market), we've gone from a capital surplus to a capital shortage, and this will likely continue long into the future due to demographics (working age population shrinks, wages get pushed up, and a whole lot of debt that needs to get refinanced at current and forward curve interest rates [real estate, private equity, sovereign debt, etc]).
https://www.apollo.com/wealth/insights-news/insights/daily-s...
If you can forecast the cost of money curve, you can forecast "who has been swimming naked when the tide goes out" based on their debt load and future cost of debt, and therefore when the economics turn against what the fundamentals can support.
https://www.ustreasuryyieldcurve.com/
https://buffett.cnbc.com/video/1994/04/25/buffett-you-dont-f...
> What do you consider hyperinflation objectively?
I remember definitions of monthly inflation rate exceeding 10%. Wikipedia has monthly inflation rate exceeding 50%.
Either way, far higher than USA currently has.
I don't think we have a remotely accurate inflation number these days.
Provide evidence.
As I understand it, there's also a 'write-down wall' looming over many companies and assets in private equity portfolios.
Those holdings are carried in the books at valuations that arguably could be justified in the past but are no longer realistic.
Private equity firms are basically sitting on them, unable to sell them or list them at current valuations.
PE has a glut of 32,000 companies ($4T in equity) they can't sell and the average hold time is extended past 8 years.
https://www.notveryprivateequity.com/eight-year-hold/ https://www.pennmutualam.com/market-insights/blogs/chart-of-...
Indeed.
The End of Private Equity’s Leveraged Buyout Era Is Nigh - https://www.bloomberg.com/opinion/articles/2026-09-30/the-en... | https://archive.today/B1EfY - September 30th, 2026
Blackstone’s Private Equity Chief Joe Baratta Leaving Firm - https://www.bloomberg.com/news/articles/2026-09-25/blackston... | https://archive.today/ZH2so - September 25th, 2026
https://news.ycombinator.com/item?id=47049024 (citations)
For someone like me who doesn't really understand this area, what does it mean for those big VC-backed or private equity-backed firms that have bought others, and have debt?
Are they forced to sell? To raise new capital? To increase value somehow (?) to show the debt can be met? I don't know enough to even know what questions to ask. Are they in trouble, I guess, as in, suppose they had to sell to cover debt, in this market, would anyone be around to buy?
There is some variety, but a very common model in Private Equity is to acquire an asset (a company), and fund that acquisition through either equity or debt.
The ability to purchase often comes in through either Private fund investments or via Debt.
* Private funds are most often drawdown funds (Private equity funds, VC Funds, Real Estate Funds, etc.). These are managed funds not available on public markets, typically require a substantial commitment of funds, and generally in return these investors can expect a significant return on their capital.
* Debt was a very popular way to finance these purchases as well when interests rate were lower, and you expect to sell the asset/company before the debt comes due. Basically cheap money made this feasible/possible.
The expectations are typically 5-10 years for both of these funding models; with private funds, they expect to run for X years, long enough to acquire the assets, clean them up, and resell them at a profit. For debt, the expectation was to sell before the debt came due, along the same timeline.
So that's the backdrop.
The primary concern here is around investments in tech and SaaS companies impacting both models. SaaS has contracted quite a bit with pressure from AI and valuations are lower.
The article is focused on the debt financed path; PE hasn't been able to sell companies as quickly as they would like or at a price they would like, so they are sitting on the books. And for companies purchased using a combination or private funds, they have companies they can't unload for the price they would like. The funds that are in this state where they cannot sell remaining portfolio companies without realizing losses are called zombie funds.
So traditional Venture firms are not part of this (1). VC buys equity in their start-ups, not debt, so interest rates aren't a direct concern of theirs. And VC firms generally do not borrow, they raise investment funds of investors money and because it is high risk, generally speaking no one lends money to these funds.
Private Equity firms on the other hand do generally take on a lot of debt- they have their own money but they borrow even more (2) and use that amount of money to buy out the current owners of a company. Basically they borrow to turn a steady stream of revenue into the future (an existing software company that is profitable) into a big pile of cash today for the current owners. And then they need to pay off that borrowing over time, from the steady stream of revenue that the software company generates. And if they are wrong about the size of the steady stream of revenue, they basically declare bankruptcy and the people who loaned the money (banks but also pension firms etc.) now run the company.
1: The way that VC changes is that the rising interest rates mean that the returns to safe investments are higher, so in order to attract new capital VC firms have to promise even higher returns as well.
2: They borrow money to get higher returns- if you have 5 dollars in a stock and it goes up 20% you have 6 dollars. If you have 5 dollars and borrow 5 dollars and invest it in a stock that goes up 20% you have 7 dollars after you pay back the loan. The catch is, if the stock instead goes down by 20%, after you pay back the loan you only have 3 dollars. (And if the stock goes down 50% you are wiped out.) But PE firms are confident that their investments will always be winners, so they take out loans like that.
Their debt comes due. Most likely they get debt from a different bank or private credit firm to pay down the old debt.
Those who can’t refinance will sell assets or the business.
Eh, with ever increasing interest rates their may be no buyers, bankruptcy is looming.
What that means in the end will depend on individual businesses.
I will happily take the other side of that bet
https://archive.is/lokbc
Everyone seems to agree that PE is bad, but what about pension funds and other institutional investors in PE, would they be insolvent without PE?
Good, let it burn.
This is the PE playbook backfiring. Buy the company, load it up with debt, pillage every dollar that can be found, then try to pass it off to some unsuspecting schmuck by convincing them the company still has value. That works unless interest rates skyrocket mid flight and you have to renew the debt, then you’re royally f$&!ked.
If these PE firms are truly the business geniuses they claim to just run the companies they bought well and weather the storm. However I think we’re about to find out real quick who is actually good at business and who was just shuffling cheap leveraged money around trying to look important and smart.
pass it off to some unsuspecting schmuck
Which in some cases means the general public via IPO.
I think we’re about to find out real quick who is actually good at business and who was just shuffling cheap leveraged money around trying to look important and smart.
Sounds like a prescient proxy for AI vs humans.
> Which in some cases means the general public via IPO.
You're talking more about VC tech firms.
These distressed PE targets loaded with debt are often sold to another private buyer, or if they are taken public (sometimes not for the first time) they are much too small or have too bad of financials to be in the indexes that regular people are buying.
I think ai leads to an accounting error in software assets. So if you book keept software at x amount of goodwill that must be written down. Reason ai can clone the software fast so the value is not what is book keeped.