PE Firms Are Sitting on Software Losses They Haven't Admitted Yet

Salesforce is down 35% this year. ServiceNow has lost roughly a third of its market cap. Workday is off over 40% from its peak.

The public market has delivered a clear, real-time verdict on what enterprise software companies are worth in a world where AI is automating the tasks those companies were built to handle.

Private equity firms own hundreds of software companies. And they're not required to apply those same marks to their portfolios.

This isn't a conspiracy — it's accounting. But the gap between what PE firms are telling their investors and what public markets are saying about equivalent businesses has grown to a level that analysts, academics, and limited partners are no longer ignoring.

Here's what's happening, who's exposed, and what the numbers actually look like.

The Public Market Has Spoken

The sell-off that Wall Street started calling the "SaaSpocalypse" accelerated through February 2026, wiping out an estimated $1 trillion or more in enterprise software market capitalization.

The driver is structural fear, not a bad quarter. AI automation tools are now demonstrably capable of replacing significant portions of the workflows that SaaS companies were built to manage — legal compliance, HR processes, customer service, financial administration. When investors started pricing in the possibility that AI replaces the software itself, not just automates it, the multiple compression was swift and severe.

Public SaaS companies traded at a median EV/Revenue multiple of around 18.6x at the peak in late 2021. By early 2026, that figure had compressed below 6x — with the February sell-off pushing it further.

The question is: who else is holding software exposure at 2021 prices?

The PE Software Concentration Problem

The two dominant software-focused private equity firms are Thoma Bravo and Vista Equity Partners. Together they represent the single largest concentration of private enterprise software in the world.

Thoma Bravo

With over $181 billion in AUM and 75+ portfolio companies, Thoma Bravo has acquired an estimated $285 billion of software company value across 565 transactions in its history. Its most recent fund close was $34.4 billion — the largest software-focused PE raise ever, closed in mid-2025.

Some of its largest acquisitions were timed near the peak of software valuations:

• Proofpoint — taken private for $12.3 billion in 2021. Now generating roughly $2 billion in revenue but facing repeated IPO delays. As of late 2024, management suggested a 12–18 month exit horizon — a timeline that's now colliding with a collapsed public market.
• McAfee — taken private alongside Advent International for $14 billion in November 2021, near peak enterprise multiples.
• Medallia — Thoma Bravo's debt exposure here became a landmark valuation controversy (more below).
• SailPoint — a brighter outcome. Taken private in 2022 for $6.9 billion, then IPO'd successfully in February 2025 at a $12 billion valuation — one of the sector's rare clean exits.

On February 11, 2026, Bloomberg reported that Thoma Bravo Managing Partner Holden Spaht wrote to limited partners emphasizing "strong bookings growth and high margins" across their portfolio — a direct response to investor anxiety about the public software sell-off.

Vista Equity Partners

Vista manages more than 90 software companies with over $107 billion in AUM, serving 450 million users across its holdings. On February 19, 2026, CEO Robert Smith hosted a direct webinar with LPs arguing that "the vast majority of Vista's portfolio companies are not experiencing meaningful churn or losing clients to AI alternatives."

Both firms are essentially arguing the same thing: their private companies are different from the public ones getting sold off. That may be true — private software businesses are often more mature, less growth-stage than public names. But the argument is untestable without transparent marks.

The Rest of the Complex

On February 23, 2026 — when the software sell-off intensified — Blackstone shares fell 6.2% and KKR declined nearly 9% in a single session. Public investors were voting on what they thought private portfolios were actually worth.

Why the Marks Don't Move

Understanding the gap between public and private valuations requires understanding how PE accounting actually works.

Private equity firms report portfolio valuations under FASB ASC 820 (Fair Value Measurement). The standard requires "fair value" reporting — but defines fair value as "the price that would be received to sell an asset in an orderly transaction" using discretionary methodologies.

The three primary approaches:

Critically, valuations update quarterly. LP statements received in Q1 2026 may reflect Q3 2025 marks — meaning investors in these funds are looking at valuations that predate the sharpest part of the public software sell-off by four to six months.

This structural lag has a name: volatility laundering — a term coined by AQR's Cliff Asness to describe how PE's discretionary valuation process systematically understates portfolio risk.

The market provides its own signal: listed private equity funds — vehicles that own PE assets but trade on stock exchanges — currently price at roughly 70 cents on the dollar relative to their self-reported NAV. That's the public market's implicit assessment of how accurate those books are.

The Private Credit Dimension

The equity exposure is only part of the picture. The more acute near-term risk is in private credit — the $3 trillion market of direct loans that PE firms used to finance software buyouts.

Software and technology account for approximately 25% of all private credit exposure — roughly $750 billion in loans, most originated in 2019–2022 when PE firms were doing deals at peak multiples.

The Stress Signals Are Already Showing

PIK interest (payment-in-kind) is when a borrower can't pay cash interest and instead adds it to the principal balance. It's the private credit equivalent of a credit card balance growing each month. When 8.8% of new loans are structured with PIK provisions and shadow defaults are at 6.4%, lenders aren't recognizing losses — they're extending and pretending.

The Medallia Incident: A Case Study in Valuation Opacity

Medallia, a customer experience software company backed by Thoma Bravo, had a $1.8 billion direct loan originated in 2021. By late 2025, three different lenders were marking the exact same loan at drastically different prices:

Bloomberg described the 14-point spread between Apollo's 77-cent mark and KKR's 91-cent mark as a record-wide gap for a single private credit instrument.

Three sophisticated institutions holding the same loan, using the same "fair value" accounting standard, arriving at valuations that differ by $252 million on a single instrument. One of them is right, and the others are carrying phantom assets.

UBS's Warning

In February 2026, UBS strategists issued a forecast that private credit could see default rates reach 15% in a worst-case AI disruption scenario — up from their prior 13% estimate issued just weeks earlier. Their central case remains significantly lower, but the direction of revision matters. Approximately 40% of all sponsor-backed direct loans are tied to software companies, which is why AI-driven software demand destruction poses a systemic — not just company-specific — risk to the private credit market.

The Exit Problem

The valuation questions would resolve themselves if PE firms were actively exiting positions. Acquisitions or IPOs require arms-length buyers who validate prices. But the exit market is largely frozen.

When PE firms can't exit cleanly, they've turned to continuation vehicles — GP-led secondaries where assets are transferred from aging funds into new vehicles. These transactions grew from roughly $35 billion in 2019 to an estimated $100+ billion by end of 2025. The problem: approximately 87% of single-asset continuation vehicles price at 90%+ of NAV — meaning the firm is essentially setting its own exit price. No adversarial buyer. No price discovery. Researchers from CEPR have documented that institutional LPs including the Alaska Permanent Fund Corporation and the Teacher Retirement System of Texas have explicitly raised concerns that continuation vehicles are delaying rather than resolving the valuation question.

What Limited Partners Are Saying

McKinsey's Global Private Markets Report 2026 surveyed institutional LPs. Their top concerns:

• 70% of LPs cited delayed exits and lack of liquidity as a primary concern
• 62% of LPs cited valuation write-downs as a primary concern

These aren't abstract fears. Pension funds and endowments that invested in 2021–2022 vintage PE funds expecting 5–7 year return cycles are now looking at 10+ year timelines. Distributions from PE firms fell below capital contributions for multiple consecutive years before a partial recovery in 2025 — a cash squeeze for institutions that allocated heavily to PE on the assumption of regular return of capital.

CalPERS, the nation's largest pension fund, increased its private equity allocation target to 17% in 2024. CalSTRS explicitly notes in its disclosures that private asset valuations lag three months behind current market conditions as a standard industry practice. That means LP statements landing in Q1 2026 may still show Q3 2025 marks — a point-in-time that predates the most intense phase of the software sell-off.

The Counter-Argument (The GPs Aren't Wrong Either)

In fairness to the private equity firms: they are making a coherent argument, not just stalling.

Thoma Bravo and Vista's LP communications aren't simply "trust us." They're arguing that their specific portfolio companies — mature enterprise software with long-term contracts, sticky enterprise relationships, and high switching costs — are structurally different from the high-growth, high-multiple public names getting destroyed.

That argument may have some validity. A company like Proofpoint (email security, mission-critical infrastructure) isn't the same risk profile as a growth-stage SaaS company reliant on rapid adoption. BMC Software's mainframe management tools have different AI substitution risk than, say, a point solution for HR workflow.

Brookfield CEO Bruce Flatt stated directly in late February 2026 that AI risks to private credit are "not a systemic threat" and that the market is overreacting to sentiment rather than fundamentals.

But here's the uncomfortable reality: the argument that private businesses are insulated from public market pricing is only provable in an active exit market. When exits are frozen, when continuation vehicles set their own prices, and when lenders mark the same loan 14 cents apart — the insulation argument can't be independently verified.

How to Monitor the Asset Managers Caught in the Middle

The public companies most directly exposed to these dynamics are the alternative asset managers themselves — Blackstone, KKR, Apollo, Ares, and others. Their revenues depend on management fees and performance fees (carry) that are directly tied to how their portfolios are valued and when exits occur.

What to Watch For

The story isn't resolved — it's developing. Here are the signals that will determine whether this ends in an orderly repricing or a harder landing:

Bullish resolution signals:

• Exit markets reopen; PE firms complete IPOs or M&A exits at reasonable prices
• AI disruption proves to be labor-augmenting rather than software-replacing
• Interest rate environment eases, compressing private credit stress
• Public software multiples recover, validating current private marks

Bearish escalation signals:

• A major PE firm takes a public write-down on a flagship portfolio company
• A cluster of private credit defaults in software forces BDC NAV reductions
• LP redemption requests at private credit vehicles exceed redemption gates
• Continuation vehicle transactions price below 80% of NAV, signaling market skepticism

The Medallia loan marks may be the most honest data point currently available. When three sophisticated lenders mark the same instrument 14 cents apart, the market is effectively admitting it doesn't know what these assets are worth. A 91-cent mark and a 77-cent mark cannot both be right — and one of those institutions will eventually have to reconcile with reality.

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This article is for educational and informational purposes only. It does not constitute investment advice. All valuation data, fund disclosures, and market statistics are sourced from public filings, Bloomberg, McKinsey's Global Private Markets Report 2026, PitchBook, and other cited sources. Past performance of private equity funds is not indicative of future results.