Few debates in markets right now are hotter than this one: Is AI about to commoditize software?

Public software valuations have reset sharply. Multiples sit more than one standard deviation below their eight-year average. At the same time, private equity remains deeply exposed to the sector, with software accounting for roughly 18% of total US PE deal value in 2025. When the largest allocation within buyouts collides with a structural disruption narrative, investors pay attention.

Our analyst note Private Equity's Exposure to the Software Reckoning examines the data behind the headlines and the positioning of leading managers.

If code goes to zero, what happens next?

The most aggressive bear case argues that AI will commoditize application software. If functionality migrates into foundation models and code becomes freely generated, traditional SaaS layers could see pricing pressure and margin compression.

But consider a practical question.

If software is destined to be free, have you convinced your organization to replace Microsoft Office with OpenOffice?

OpenOffice has offered near feature parity for years. The cost of code has effectively been zero in many areas of open-source software. Yet enterprises overwhelmingly remain with incumbent platforms. Why? Because software is not just code. It is integration, compliance, support, workflow, training, security review and organizational habit.

Large enterprises do not replace core systems lightly. Migration requires retraining employees, converting historical data, rebuilding embedded processes and accepting operational risk. Security and compliance reviews alone can take quarters. The friction is real.

This does not mean AI will not reshape the landscape. It almost certainly will. But displacement tends to move more slowly than narratives suggest.

Valuations reflect fear. Is it overdone?

Public software multiples have compressed sharply, and the historical inverse relationship between rates and multiples has weakened as AI disruption risk has become the dominant driver.

 

That leaves investors with a harder question. How much discount is appropriate for structural uncertainty?

Periods of confusion and panic have historically created attractive deployment windows for PE investors, particularly when valuation compression outpaces fundamental deterioration. Severe resets rarely feel comfortable in real time. They often look obvious in hindsight.

If one believes software economics are permanently impaired, the case for avoiding the sector is straightforward. But if AI integration proves evolutionary rather than existential, today's valuation levels may represent one of the more compelling entry points in years.

The debate is structural, not cyclical

The central issue is no longer growth rates. It is durability.

Are traditional application layers at risk of commoditization? Or will systems of record, infrastructure software and platforms embedded deeply within enterprise workflows retain pricing power?

The largest public alternative managers are signaling a measured view. On recent earnings calls, firms framed the reset as defensive but opportunistic. Underwriting standards are tightening. Capital is being deployed selectively. AI is treated as both a risk factor and an operational lever.

The full note quantifies private equity’s exposure to software, breaks down the historical rate-multiple relationship and reviews how leading managers are positioning portfolios in response to AI-driven uncertainty. Download it here to explore the data and analysis.

This is one of the defining debates for private markets in 2026. Whether this reset proves to be a structural repricing or a historic opportunity will shape capital allocation for years to come.