Key Takeaways

  • Software deal activity plunged dramatically in H1 2026, with Q2 alone seeing a 60% drop versus Q1, per Steven Buibish of PitchBook, marking a clear 'freeze' in the sector.
  • The core issue isn't AI replacing software, but rather the market's inability to accurately price software assets amidst the uncertainty of AI's impact and future trajectory.
  • Despite this sharp reduction in deal volume and reduced leverage, Devin Mathews observed that software valuations have largely held firm, creating a disconnect between perceived value and transactional reality.
  • Capital is actively re-allocating towards 'HALO' (Hard Assets, Low Obsolescence) sectors, including energy, construction, engineering, and data centers, signaling a pronounced shift in PE's investment focus.
  • One PE firm, for instance, received a "cool reception" when marketing a top-tier software business in January, not due to its quality, but because buyers found it impossible to underwrite in the current environment.

The Software Chill: Pricing Uncertainty Freezes Deals

The H1 2026 private equity market delivered a "false start," particularly for software. Steven Buibish reported a significant downturn, stating that "software… first half of this year versus… the first half of the prior year is down 28%. In Q2 alone it was down over 60% versus Q1. So you saw… deal activity in software freeze up." This isn't a simple dip; it's a dramatic contraction. The root of the problem, according to Devin Mathews, isn't that "AI is replacing software," but a profound pricing conundrum. Buyers are struggling to underwrite these assets because "the market just doesn't know how to price it right now and they don't know what AI is coming for and what isn't because it's still too early."

Mathews illustrated this with a concrete anecdote: his firm brought “one of the better businesses we've ever owned” – a software asset – to market in January. The reception was "very cool," not because of the asset's quality, but because potential buyers confessed, "I can't underwrite this right now." This inability to underwrite means capital is effectively locked out of software deals, even for high-performing assets. Compounding the challenge, Mathews noted, is that despite the sharp fall in volume and a reduction in available leverage, "prices didn't change." This creates a precarious situation where sellers expect old valuations, but buyers simply cannot justify them given the AI-driven uncertainty.

HALO's Ascent: Physical Assets Gain Favor

While software deals hit a wall, capital isn't sitting idle. Steven Buibish pointed to a distinct rotation into what's been coined 'HALO' assets: “hard assets, low obsolescence.” He specified, “we're seeing a big spike in energy… and other other hard assets.” This includes sectors like construction, engineering, and data centers. This isn't just a marginal adjustment; it's a clear signal that private equity's investment playbook is shifting from the software dominance of the last decade towards more tangible, predictable, and physically backed assets. The perceived stability and lower obsolescence risk of these HALO assets offer a clearer underwriting path for dealmakers who are currently stymied by the opaque future of software valuations.

This move reflects a flight to perceived safety and a desire for more traditional, asset-heavy investment profiles. The rationale is simple: hard assets present fewer unknowns related to technological disruption than software, where the rapid evolution of AI makes long-term forecasting a speculative exercise. As capital searches for reliable returns, the shift towards infrastructure-like assets indicates a recalibration of risk appetite across the private equity landscape.

Why It Matters

This market dynamic signals a profound re-calibration of risk appetite and valuation methodologies for private equity. The disconnect where software deal volume collapses while prices remain stubbornly high suggests a looming or already active valuation correction for many legacy software portfolios. For LPs, this could mean extended holding periods for existing software investments or creative, potentially value-dilutive, exit strategies as GPs grapple with unsaleable assets at current marks. For deal professionals and operating partners, the pivot to HALO assets dictates a shift in talent, expertise, and capital allocation focus. Successful new deal flow will increasingly depend on deep operational acumen in physical infrastructure and industrial sectors, rather than the pure growth metrics that defined the software boom. This isn't merely a sector rotation; it’s an acknowledgement that the old underwriting models for technology are broken, forcing a return to assets with more predictable cash flows and defensible positions against disruptive tech. The market is effectively telling PE to find tangible value, or wait indefinitely.