By Heather Gillers

Software companies were struggling to pay off private loans even before the SaaS-pocalypse.

The slice of private software debt worth less than 80% of its original value hit a five-year high last year, according to an analysis provided by MSCI. That share peaked at 6.1% at the end of September, or roughly five months before software-company stocks tumbled in value on concerns their businesses might be outmoded by artificial-intelligence tools.

Many of those loans were likely issued in the years after the onset of the Covid-19 pandemic, when employers adapting to remote work spent heavily on new tools, lifting software sales, said Gil Luria, head of technology research at D.A. Davidson. The software firms borrowed against those revenues, often at the behest of the private-equity firms that owned them. Employers eventually cut back. But the debt stayed.

Software companies "were taken private with very high leverage assuming those revenues would keep recurring forever even though the private-equity managers also cut costs at all these companies," Luria said.

The MSCI data offers a rare window into the $2 trillion market for private credit, or illiquid debt securities and funds that have emerged as a core holding for countless pensions, sovereign-wealth funds and insurance companies in their quest for higher yield. Typically, outsiders can only peer into publicly traded private-credit funds sold to individual investors for a read on what's happening in this opaque market.

But MSCI looked at $73 billion in holdings from pensions, university endowments and other institutional investors that receive its private-market return statistics and other data. And when they isolated those investors' private loans to information-technology companies, MSCI analysts discovered that the share of debt marked down more than 20% climbed to 6.1% from 4.8% over the first nine months of last year.

Markdowns dipped in the fourth quarter to 4.7% but remained above the five-year quarterly average of 4.4%. And there is reason to think things will get worse, said Patrick Warren, MSCI's head of private-credit research. He estimated it can take private markets two quarters to fully price in the impact of developments that public markets often price in instantaneously.

That means the record markdowns last year don't factor in the extent of concerns that artificial-intelligence agents like Anthropic's Claude Cowork, launched in January, will displace traditional software tools. Those fears triggered the SaaS-pocalypse, so-called because the selloff seemed to hit hardest companies that offer software as a service, like Adobe and Salesforce. The iShares Expanded Tech-Software Sector ETF, which holds SaaS stocks, fell 24% in the first quarter and then made up some of those losses with a 13% gain in the second.

"Even when we get the Q1 numbers, we're not likely to fully see the reaction to Claude Cowork," Warren said. "The data lags there are keeping us in suspense."

That reaction hasn't been readily apparent in the public bond market, analysts said, because software doesn't make up a big share. But MSCI's data show IT loans have become an increasing part of private-credit portfolios.

Software accounted for 17% of the institutional-investor debt in MSCI's data set at the end of 2025, second only to industrial companies and up from 12% in 2019. It makes up an even larger share — about 25% on average — at four major business-development companies geared toward individual investors, The Wall Street Journal has found. Concerns that old IT tools will become obsolete, stressing software borrowers, are part of the reason individual investors have yanked money from BDCs.

The MSCI data also revealed broader stress across private credit after three years of elevated rates. The share of healthcare debt marked down more than 20% hit a five-year high of 7.4% last year. Loans to consumer-discretionary companies, which sell nonnecessity products such as vacations and restaurant meals, suffered their worst markdowns since early in the pandemic.

Some examples of that credit stress have already become apparent. A British mortgage company, Market Financial Solutions, is collapsing and facing accusations of fraud, the Journal reported in March, which might lead to losses for Apollo Global Management's Atlas SP Partners and other lenders. And first-quarter valuations of individual loans are public for BDCs, which have stricter reporting requirements than institutional funds.

BDC Blackstone Secured Lending Fund marked down to 80% a loan to healthcare company Navigator Acquiror that makes up 3.5% of the fund's net asset value. Defaults by software maker Medallia and dental-service company Affordable Care contributed to a $560 million write-down for the KKR business-development company FS KKR Capital, equivalent to 10% of the fund's net asset value.

Apollo Chief Executive Marc Rowan and Blackstone President Jon Gray have said that fear of broad stresses in private credit are overblown.

Perhaps counterintuitively, the MSCI data didn't show significantly better performance for private-credit funds run by more experienced managers, Warren said. It did show that large funds contained less marked-down debt than small ones.

"Smaller funds tend to lend to smaller borrowers who are more susceptible to stress in a higher rate environment or a tougher macro environment," he said.

Write to Heather Gillers at heather.gillers@wsj.com