By Christopher Combs
Chief Investment Officer, Silicon Valley Capital Partners
August 12, 2026
Artificial intelligence is beginning to expose a vulnerability in the software industry that has less to do with technology than with finance.
For much of the past decade, software companies were among the most attractive targets for private-equity buyers. Subscription revenue was recurring, margins were high and capital requirements were relatively low. Those characteristics made software businesses particularly well suited for leveraged acquisitions.
The calculation was straightforward: predictable revenue could support substantial debt.
Now AI is challenging the predictability behind that calculation. New models can write code, automate workflows and perform tasks previously handled by specialized software applications. The result isn’t likely to be the destruction of the software industry. It is more likely to be a widening divide between companies that benefit from AI and those whose products become easier to replace.
For investors, three issues matter most.
1. AI Is Rewriting Software Economics
The first risk is competitive.
Traditional software companies built powerful businesses around recurring subscriptions and high customer retention. AI is lowering the cost of developing software and making it possible to automate increasingly sophisticated tasks.
That could pressure pricing and subscriber growth for companies selling products that can be replicated or absorbed into larger AI platforms.
But disruption will be uneven.
Companies controlling proprietary data, mission-critical workflows or deeply integrated customer platforms could become more valuable as they incorporate AI into their products. AI may increase their productivity while strengthening the value they provide customers.
The market therefore isn’t facing the end of software. It is facing a repricing of competitive advantage.
2. Debt Could Turn Disruption Into Distress
The second issue is financial.
Software companies acquired during the low-rate era frequently carried substantial leverage. That wasn’t necessarily problematic when revenue was growing rapidly and borrowing costs were exceptionally low.
Both conditions have changed.
Higher interest expense consumes cash that could otherwise fund research, acquisitions and AI development. At the same time, slower revenue growth can quickly weaken the financial assumptions underlying a leveraged acquisition.
That creates an important distinction between public and private software companies.
A well-capitalized public company can tolerate several disappointing quarters while investing heavily to reposition its business. A heavily indebted private company may have far less time.
Two companies can face precisely the same technological threat and experience dramatically different outcomes simply because one has a stronger balance sheet.
AI creates the disruption. Leverage determines how much time management has to respond.
3. Refinancing Will Be the Real Stress Test
The third issue may be the most important.
A significant amount of software debt financed during the previous investment cycle will need to be refinanced over the next several years.
Those companies will approach lenders in a substantially different environment.
Creditors will increasingly scrutinize revenue growth, customer retention, AI exposure, free cash flow and the willingness of private-equity owners to contribute additional capital.
Strong businesses should refinance without significant difficulty. Others may extend maturities, sell assets, inject additional equity or accept higher borrowing costs.
The weakest capital structures may require restructuring.
That process could also expose a broader vulnerability in private markets: valuation transparency.
Public stocks and bonds reprice continuously as expectations change. Private investments generally adjust more slowly. A company’s economic prospects can therefore deteriorate before that deterioration is fully reflected in reported portfolio values.
Refinancing changes that. When a company needs new capital, lenders effectively impose a new market price on risk.
The Investment Implication
The central investment question isn’t whether AI destroys software. It is which companies possess the competitive advantages and financial resources necessary to navigate the transition.
Companies with proprietary information, entrenched customer relationships, durable pricing power and strong balance sheets should have substantial advantages.
The greatest vulnerability lies at the opposite intersection: businesses facing technological disruption while carrying aggressive valuations and heavy debt.
For years, leverage amplified the returns generated by predictable software revenue.
AI is changing that equation.
During periods of stability, leverage can enhance returns. During periods of technological upheaval, financial flexibility becomes an increasingly valuable competitive advantage.
The software industry’s next chapter may therefore be determined by two forces operating simultaneously:
AI will determine the speed of disruption. Capital structure will determine who has enough time to adapt.