What’s in This Week’s Issue…

Good morning. Over the last decade, private equity poured hundreds of billions into software companies because subscriptions made debt look predictable and safe.

And for years, that bet worked better than almost anything else in finance.

That assumption is now breaking as the economics of software begin to change, and the leverage built on top of it is starting to show stress.

So this week…

• 🏆 The Big Play: How AI is ending private equity’s software gold rush

• 💪 The Power Move: Why the real risk was always in the debt

• 💵 Follow the Money: Who really killed American nuclear scientists?

-GEN

🏆 The Big Play

The biggest money power story of the week.

How Private Equity Got Stuck With Software

Private equity concentrated heavily in software because it offered something most industries could not.

It made future cash flows look stable enough to support large amounts of debt.

That stability held for years, and now it is starting to weaken.

1. The Bet That Always Worked

A typical software deal followed a structure that looked repetitive but worked at scale:

• Companies were bought at 20 to 24 times EBITDA, with around 60 to 70 percent of the deal funded through debt.

• Subscription revenue with margins between 70 and 90 percent was used to service that debt.

• Low churn and long-term contracts kept cash flows steady.

• Exits were planned within five to seven years at similar or higher valuation multiples.

As long as growth held, the model delivered returns even without major operational changes. Between 2015 and 2025, private equity firms acquired more than 1,900 software companies in deals worth over 400 billion dollars.

That level of activity turned software into a core dependency, not just another sector allocation.

And now that the conditions supporting it have begun to change, the same dependency has turned into a huge risk.

2. When the Model Starts Tightening

The first pressure came from the cost of money, and it did not stay limited to that:

• Interest rates rose after 2022, increasing borrowing costs and making refinancing harder.

• Revenue growth slowed from around 27 percent in 2021 to about 10 percent by 2025.

• IPO markets became more selective while buyers grew cautious on pricing.

• Valuation multiples declined, reducing expected exit returns.

In this whole model, growth plays two roles:
→ It helps reduce leverage over time
→ Supports higher valuations at exit

But when growth slows, both of these effects weaken together. The result is visible in the backlog.

Private equity is holding roughly 32,000 companies worth about 3.8 trillion dollars, many of them bought when growth and valuations were higher.

That pressure would be manageable on its own, but the underlying assumptions are also starting to shift.

This is where the problem shifts from financial conditions to the asset's structure itself.

3. The Assumption That Just Broke

Private equity underwrote software deals based on how software behaved over the last decade. That behavior is now changing:

• AI systems can handle tasks across writing, support, coding, and analytics that previously required separate tools.

• Seat-based pricing weakens as fewer employees are needed to produce the same output.

• Lower development costs allow new competitors to build and release products faster.

• Customers have more alternatives, which increases pricing pressure and reduces lock-in.

Each of these reduces predictability, which is the condition that supports leverage. Public markets have already reacted through declines in software stocks, but private valuations adjust more slowly because they are not marked in real time.

The real stress shows up in credit markets instead. Around 25 billion dollars of software-related loans are trading at distressed levels, and the sector makes up a larger share of stressed debt than its overall size would suggest.

And when debt markets start reflecting risk ahead of equity valuations, it usually means the assumptions have already shifted.

💪 The Power Moves

Playbook for understanding the game of power.

Why The Real Risk Was Always in the Debt

Private equity built its software strategy on the idea that revenue from these businesses would remain predictable.

That belief supported high leverage, high valuations, and large flows of capital into the same type of asset.

• Predictable cash flows made lenders comfortable extending more debt

• Stable growth allowed firms to rely on future expansion to reduce leverage

• Pricing power supported valuation multiples at exit

• Low disruption risk made the structure look durable

When predictability weakens, the structure does not fail immediately but starts tightening because each layer depends on the one below it.

And that’s how it all starts to fall like dominoes.

And when it does, it would not stay inside private equity. The same money backing these deals comes from your pension funds, insurance pools, and retirement savings.

So when this model starts breaking, it would not necessarily show up as one big crash. It would show up quietly, in weaker returns, tighter lending, and fewer opportunities for your money to grow.

And most people only notice it after the outcomes are already worse.

The Takeaway:

When an industry looks stable enough to support heavy leverage, the real risk lies in the assumption that this stability will continue.

Once that assumption starts changing, the pressure moves through everything built on top of it.

And by the time it becomes visible, the impact has already reached you.

💵 Following the Money

Three of the wildest financial and corruption stories from around the world.

#1 - FBI probes deaths, disappearances of scientists tied to US research

#2 - New tariff refund system opens with glitches and big limits

#3 - Oil tankers are ready to cross the Strait of Hormuz. Can they afford the risk? 

✨ Poll time!

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