AI Threat Hammers Private Software Investments by 20%
(Bloomberg) — Executives at some of Wall Street’s biggest names have faced a barrage of recent questions about whether artificial intelligence has crippled the value of their software investments.
Their answers have a common refrain: There’s nothing to see here.
But public data from mutual funds, which invest in many of these same companies, show steep declines that suggest private markets’ investors are sitting on tens of billions in paper losses.
Databricks Inc., the data-software company, has drawn backing from the likes of BlackRock Inc., Insight Partners and Tiger Global Management. In the first three months of the year, mutual funds reduced its value by an average of 16%, regulatory filings show.
They also marked down by 15% the online graphic design platform Canva, which is held by Coatue Management and others. Video game developer Epic Games Inc. was cut by 22%. It’s held by the mutual fund giants as well as private equity and venture firms, including KKR & Co.
To better understand the depth of the pain lurking in private market investments, Bloomberg News looked at how mutual funds assessed the value of nearly 50 private software companies across hundreds of portfolios. On average, they were marked down by 20%, public disclosures show. Some were slashed by more than 50%.
“They know there’s no appetite and there’s no clear way out,” said Aram Green, a portfolio manager at ClearBridge Investments, whose funds have small stakes in private software companies. The markdowns are “a harbinger and we’re going to see more of this.”
The lower valuations underscore ongoing disruption in the software industry and also offer a rare peek into the opaque portfolios of private equity, hedge funds and venture firms — which aren’t required to publicly report valuations the way mutual funds are. Private markets firms tend to have more flexibility in how they mark their investments.
Figuring out the fair market value of any illiquid asset has long been a vexing issue for Wall Street. Assessing the current worth of software company investments parked in private funds is particularly challenging in the age of AI. Advancements in the technology mean AI firms can build software faster and cheaper, and some argue this poses an existential threat to the industry.
Private asset managers have said that’s hyperbolic — or at least that they’ve largely avoided the most vulnerable investments.
“You’re not going to hear any management team come out and say, yeah, we’re dead,” said Dan Niles, founder of tech-focused fund Niles Investment Management.
There are signs that the industry has started to acknowledge some of the pain: A recent Bain & Co. report estimated that software valuations in private equity portfolios declined by 8% in the first quarter.
Fidelity Investments, Bank of New York Mellon Corp.’s asset management arm, and Capital Group, as well as smaller firms like Franklin Resources Inc.-owned ClearBridge and Hartford Funds, have cut values more dramatically. At mutual funds, independent committees typically make valuation decisions.
Among the steepest haircuts are a 50.8% markdown for machine learning and enterprise software company DataRobot Inc. and a 51.4% reduction for software solutions firm Outreach Corp. Both are also held by some of Wall Street’s biggest names in private markets.
Those cuts contrast sharply with other investments held by mutual funds of mostly AI and semi-conductor companies. They were marked up by 40% on average by the mutual funds, according to the disclosures. AI firm NScale, for example, was up 222%.
Epic Games and Canva said the quarterly markdowns don’t reflect their companies’ long term outlook and value. Canva added that the firm is accelerating its investment in AI and that it continues to see “strong demand from both new and existing investors.”
BlackRock, Tiger Global, Coatue and KKR declined to comment, as did Fidelity, Capital Group, Hartford Funds and BNY Mellon. Databricks also declined to comment. Insight, along with DataRobot and Outreach, did not respond to requests for comment.
For mutual funds, these holdings represent a tiny fraction of their portfolios, so the on-paper losses have little effect on overall performance.
The total amount of money in software investments held on the books of alternative asset managers and venture capital funds is difficult to assess, but by some measures could be in the hundreds of billions. In 2025, the value of software-related private equity transactions reached $203 billion, according to a recent report by PitchBook.
Overall, money flowing into the software sector has surged: Data collected by Bloomberg show software and technology companies accounted for half of new private equity and venture capital investments, more than double that share from 15 years ago.
For private equity, misgivings about the value of these software investments have compounded the industry’s broader woes. In recent years, firms have struggled to sell assets at a profit and return capital to investors. The market was further rattled in April when Thoma Bravo, a software-focused private equity firm, said it lost more than $5 billion on a single bet, online customer-survey company Medallia Inc., though the firm has said the loss was unrelated to AI disruption. And investors are fleeing from some of the private credit firms that lent big to software companies.
In conferences, TV interviews and analyst calls, executives accept there will be winners and losers but insist that, on the whole, software firms will adapt to AI. Thoma Bravo founder and Managing Partner Orlando Bravo said earlier this year on CNBC that his fund’s software companies “are crushing it,” while Vista Equity Partners Chief Executive Officer Robert Smith said in a video on the firm’s website that “this moment is not the end of the software story, it’s just the beginning of its next chapter.”
In June, Goldman Sachs Group Inc.’s External Investing Group, part of its asset management division, applied the bank’s AI Disruption Framework to some 700 private software firms that it invests in, the firm told Bloomberg News. It found that 10% of these companies were facing imminent disruption risk, and on the other end of the curve, another 10% to 15% were clear winners. The vast middle, however, has about 18-36 months to figure it out, adapt and pivot, or face the consequences.
Apollo Global Management Inc. is now assessing every new software investment opportunity for AI disruption risk. Ares Management Corp. has hired an outside consultant to scrutinize software-oriented investments in its largest publicly traded private credit fund. Blackstone Inc. and Blue Owl Capital Inc. have conducted internal evaluations of their investments.
Over at the vanilla mutual funds — not a usual target for private companies seeking to raise money — the phones have been ringing. On the other end of the line are investment bankers pitching meetings with software firms that are looking for backers, people involved in these conversations said. The answer, these days, is rarely yes.
“How many of these companies will successfully make the pivot? That’s the $64,000 question,” said Michael Brandmeyer, the global head and chief investment officer of Goldman’s External Investing Group. “The reality of AI disruption is much more nuanced.”
