Private credit investors are facing growing uncertainty over recovery prospects in software lending as artificial intelligence accelerates structural disruption across the sector, according to hedge fund Davidson Kempner Capital Management LP.

Speaking at the Milken Institute Global Conference, chief investment officer Tony Yoseloff warned that AI-driven change could further weaken already modest recovery rates in leveraged loans tied to software companies. He noted that average recoveries on first-lien debt have been below 40 cents on the dollar over the past five years, with software assets likely to perform even worse due to their limited tangible collateral.

Yoseloff highlighted the sector’s heavy reliance on private equity-backed borrowers, pointing out that around 41% of US buyout investment last year was allocated to software businesses. This concentration, he suggested, leaves private credit lenders particularly exposed as AI reshapes competitive dynamics and business models.

The concern is amplified by broader stress in the asset class, as software-heavy portfolios – especially those held by business development companies – have experienced increased pressure and investor withdrawals in recent months.