AI is breaking the capital structures of enterprise software.

AI is breaking the capital structures of enterprise software.

The Carry · November 8th. 6 min 3 sec.

Cold open

The syndicated loan market for enterprise software just hit a wall. Lenders are terrified of AI obsolescence. They're dumping SaaS debt. Prices on software loans just dropped from 94 cents to 87 cents on the dollar practically overnight. The pristine collateral of software is breaking down. That's a massive shift.

Intro

This is The Carry for November 8th. We went through the top private equity podcasts this week so you don't have to. Here's what actually mattered for deals, capital, and the market. Let's get into it.

AI breaks traditional software investing

Enterprise software debt is cracking. On Private Equity Funcast, Kenny Tang pointed out that the release of Claude's new capabilities completely shattered the illusion of SaaS as perfect collateral. Lenders are terrified of existential obsolescence. Broadly syndicated software loan prices fell instantly from 94 cents to 87 cents on the dollar. Tang noted that this single event forced the private credit market to rapidly shift away from software and pivot into hard assets. That's a massive repricing of risk. Over on Capital Allocators, Vik Uppal is sitting out the infrastructure buildout entirely. He drew a direct parallel between the current AI data center rush and the late nineties telecom boom. The traffic projections back then were dead on. The debt structures still collapsed anyway. Dark fiber ended up trading for pennies on the dollar. Uppal warned that lenders taking on technology risk today are accepting a capped upside against a total loss of capital. Meanwhile, the traditional horizontal software model is breaking down. Joseph Coyne explained on How I Invest that horizontal AI companies now function as commoditized utility layers. They're destroying the defensible margins historically found in broad enterprise SaaS. Pure technical tools just fail to address legacy workflows in regulated industries. Coyne argued that defensible software margins now belong exclusively to vertical products built by domain veterans. No human in the loop. The market is pricing in a total reset on what software is actually worth.

Private capital moves to gathering fees

The scale of private equity has fundamentally changed the business model. Firms are moving away from generating alpha to simply gathering assets. Vik Uppal bought a credit shop specifically to bypass early fund drag. On Capital Allocators, he explained how he restructured it to avoid the overhead requirements that force continuous capital deployment. These massive platforms have effectively become asset factories. They focus entirely on maximizing management fees instead of waiting for genuine value creation. The deployment mandate is the product. That constant pressure to deploy created a massive overhang of non-performing paper. Over on How I Invest, Jack Selby broke down how thirteen years of cheap money warped venture capital economics. The market is now littered with zombie funds stranded with illiquid assets. Firms classified as B-minus or worse completely missed the 2021 market peak. Now they're just riding out ten-year lifecycles to collect fees. Selby noted the industry has done a terrible job of returning capital to investors over the last decade. He estimates the liquidation cycle is only in the second inning. Think about what that does to pricing. LPs are trapped in aging vehicles. The secondary market is completely choked with overpriced paper waiting for a write-down. That's the signal.

Jack Selby

Jack Selby pointed out the mathematical absurdity of modern venture pitches on How I Invest. He broke down how founders and fund managers are trying to sell an impossible dream to allocators. Selby said, so much of Silicon Valley, the pitch today is like, I'm going to go find you the next Elon Musk at age 24. That's a terrible pitch because the probability of that's basically zero. Power laws are acting as a statistical trap for most institutional fund lifecycles. Managers are betting their entire vintage on a lottery ticket. LPs are finally waking up to the math and demanding actual returns instead of just narratives.

Kate Nimmo

Kate Nimmo joined Private Equity Funcast to talk about the rigid ways the market categorizes capital. She explained that successful software investors care about velocity over structure. Nimmo noted, we do minority deals, we do majority deals, but the emphasis is definitely on growth, and I think that's a misconception, as people think about private equity, they try to label it in a single way. Adding headcount remains the absolute straightest line to enterprise value in founder-led software. Firms obsessing over control provisions are missing the fundamental driver of returns. The smartest capital is entirely structure agnostic as long as the growth engine is actually funded and running.

Brijesh Jeevarathnam

Brijesh Jeevarathnam revealed the new reality of LP diligence on How I Invest. He explained how Adams Street completely restructured their evaluation process for early-stage managers. Jeevarathnam said, our reup on a venture fund begins the day after we commit to the current one, so in other words, it's a three-year process before they raise the next fund, we're in continuous DD on the next fund. LP allocations are moving permanently away from ninety-day sprints. They're running rolling audits of early-stage managers. That continuous oversight changes the entire capital raising dynamic. General partners are now auditioning for their next vehicle every single week.

The bottom line

Consensus capital continues crowding into early-cycle AI data centers and infrastructure. The sharpest allocators are quietly hunting for mispriced recapitalizations and distressed software debt. The capital structures of enterprise software are fracturing under the weight of AI obsolescence. Firms operating massive asset factories are trapped managing legacy paper. That dislocation is where the actual alpha lives right now. That's The Carry. See you next Sunday.