PIMCO warns AI threatens private credit software business models

One of the world’s largest fixed-income managers just told investors that AI isn’t merely disrupting tech companies. It’s quietly eating into the credit quality of the loans backing a massive chunk of private credit portfolios.

PIMCO flagged in a March 2026 report that artificial intelligence is threatening the software investments dominating Business Development Companies, the vehicles that have become Wall Street’s favorite way to play private credit. The firm’s warning is blunt: heavy exposure to software will constrain private credit performance versus public markets and other segments of the asset class.

The software concentration problem

Software’s share of BDC portfolios has more than doubled over the past decade, according to PitchBook LCD and PIMCO data as of Q3 2025. Private equity sponsors loved the recurring-revenue story of SaaS companies, and they loaded up accordingly.

PIMCO’s concern centers on three specific vectors of damage. First, pricing power erosion. AI reduces barriers to entry, meaning incumbents can’t charge what they used to. Second, obsolescence risk for non-mission-critical tools. When a company can prompt an AI to do what a $50K-per-year SaaS subscription used to do, that subscription gets cancelled. Third, the downstream credit effects: potential downgrades and, in some cases, defaults.

The SaaSpocalypse that probably won’t be

Ares Capital, one of the largest BDCs in existence, has publicly noted that AI will create winners and losers among software borrowers rather than a universal wipeout. Some SaaS companies are deeply embedded in their customers’ workflows, with high switching costs and genuine mission-critical status. Those firms will likely weather the storm.

Morningstar echoed these concerns in its own March 2026 analysis, noting that AI impacts margins by reducing entry barriers and enabling custom builds. That dynamic adversely affects private credit loans to software firms across the board, even if the magnitude varies company by company.

Correlation risk is the hidden landmine

Beyond individual company risk, there’s a portfolio-level problem that PIMCO is highlighting. When every private credit manager loaded up on software loans over the past decade, they created a massive overlap in holdings. This means portfolio correlations among private credit managers have intensified. If AI-driven disruption hits a cluster of software borrowers simultaneously, the losses won’t be isolated to one fund. They’ll ripple across the entire BDC ecosystem.

PIMCO’s prescription is straightforward: get more selective, and look beyond software. The firm points to asset-based finance and specialty lending as areas within private credit that offer different risk profiles and aren’t sitting in AI’s crosshairs.

What this means for investors

For investors holding BDC exposure, either directly or through funds, the PIMCO report is a wake-up call to look under the hood. The broader takeaway is that passive approaches to private credit are becoming riskier. The asset class sold itself on the premise of stable, equity-like returns with bond-like consistency. AI disruption to the software sector, which makes up a disproportionate share of the underlying loans, challenges that narrative directly.

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