Artificial intelligence is reshaping the software industry, but much of the economic value is accruing outside traditional enterprise software.
Investors have increasingly focused on the infrastructure required to build and run AI systems, including semiconductors, cloud platforms and data center capacity, while much of the software layer itself, from foundation models to developer tools, is becoming more open source or rapidly commoditized. That shift has made it harder for many application software companies to sustain the same pricing power and defensibility they enjoyed in the prior cycle.
Public markets have already reflected this divergence. Since the launch of ChatGPT in late 2022, Oracle has more than doubled in value as investors bet on surging demand for AI cloud infrastructure. Microsoft has also outperformed the broader market, supported by its leadership in enterprise AI through Azure, Copilot and its partnership with OpenAI. ServiceNow has gained as customers adopt AI-powered workflow automation.
By contrast, many traditional software companies have lagged. Adobe, Workday and Salesforce have all faced periods of underperformance as investors questioned whether generative AI could weaken their competitive advantages in subscription-based software models. Even as these companies invest heavily in AI, investors have become more selective about which business models are likely to capture durable value from the technology.
The same divide is now emerging in private markets.
Private equity firms bought hundreds of software companies during the 2020–21 boom, financing many with significant debt. These businesses now face higher borrowing costs and pressure to invest in AI, forcing a trade-off between innovation and debt service.
That tension is now playing out in one of the largest restructurings in private credit.
Thoma Bravo has agreed to hand control of customer experience software company Medallia to a consortium of lenders led by Blackstone, wiping out its roughly $5 billion equity investment from 2021.
The group, including Apollo and KKR, will inject $150 million of new capital while reducing debt. The company said funds will support “AI-driven innovation and customer-focused product investment.”
Thoma Bravo acquired Medallia in 2021 for $6.4 billion, financing the deal with about $2 billion of ARR-backed debt. After interest rates rose in 2022, borrowing costs increased and the company relied more heavily on payment-in-kind (PIK) interest to manage cash flow. Lenders later tightened terms by reducing PIK and requiring more cash interest, and as interest costs eventually exceeded earnings, the capital structure became unsustainable.
Medallia also reflects broader stress in software-linked private credit, where concerns over ARR lending have driven higher investor outflows this year. In the first quarter, large funds saw outflows averaging 12.1% of net asset value, above typical gating thresholds, with the most software-exposed vehicles hit hardest.
The case underscores how AI’s impact on software is feeding back into credit markets: companies must invest to remain competitive while servicing debt raised in the previous cycle, increasing strain on lenders exposed to that boom-era financing.
