Recently, there’s been significant volatility in the public market, raising concerns about longevity for many companies in the face of artificial intelligence (AI) advances. This has led to meaningful sell-offs—often in ways that appear disconnected from company-specific fundamentals.
“There is a huge disconnect, and the narrative is wrong,” said Michael Arougheti, Chief Executive Officer of Ares Management Corporation. “Not to say that people should not be focused on AI, but you have to be thinking about opportunity and risk.” Private credit has demonstrated over decades that it is capable of weathering these moments, Arougheti added, and with a focus on durable business models and solid research on risks and disruptions, this moment should be no different.
A diversified portfolio of investments across the technology space informs how we approach the current moment in terms of both risk management and new investment opportunities. “The fundamentals and the underpinnings of our portfolio and our underwriting haven't changed,” said Kort Schnabel, CEO of Ares Capital Corporation (ARCC). “From the beginning, the number one risk that we identified in the software space was technology risk, and obsolescence risk.” These risks are heavily scrutinized, from the investment committee to post-investment monitoring to dynamic reviews of the full portfolio, including open dialogue with management teams and financial sponsors.
While core underwriting standards have not changed, AI has increased the level of scrutiny required, particularly around durability, defensibility, and replacement risk within software business models. “Obviously AI is probably the most disruptive technology risk that we could have imagined,” Schnabel said, “and it absolutely is going to disrupt a lot of software companies, and I don't want to sugarcoat it. But we still believe strongly that we've constructed a portfolio with characteristics that will remain better positioned to mitigate this risk.” What’s more, any impacts will be felt over years, not months, given how entrenched many enterprise systems are within industry and company workflows with high barriers to switching, as well as how long dated the contractual cash flows are.
By identifying these risks from the beginning, our approach helps mitigate significant short-term disruption in our direct-lending portfolio due to AI. Schnabel explained that this includes centering on foundational infrastructure software for complex businesses, companies with strong value propositions, software platforms with diversified products, customers, and revenue streams, and scaled, network-based businesses. More caution is warranted when it comes to software focused narrowly on content creation or information synthesis, as well as single-function software tools.
“We like [the] kind of software where the entire business and operations of the customers are dependent on the accurate functioning of this system,” Schnabel explained. “We really believe that these data-enabled software companies will prove resistant.” Ares also is confident in companies in regulated end-markets, where the need for accuracy and auditing of information is high, while the penalties for lack of compliance can be severe, such as healthcare or financial services. “We think it's going to take a really long time for companies in these types of industries to gain enough trust in any kind of new product,” Schnabel added.
From an underwriting perspective, we continue to focus on businesses that have a broad customer base, high retention ratios, low churn, and a long tail of stable cash flows, which mitigate downside risk. Based on internal portfolio monitoring, we observe that the fundamentals for software companies in the U.S. direct-lending portfolio remain healthy. These credit characteristics are particularly important in an AI-driven environment, as this profile is better positioned to absorb technological change without impairing credit quality. More importantly, we are a lender at the top of the capital structure, with the loan-to-value based on enterprise value below 40% on average as of December 31, 2025, and a significant equity cushion.
“Across our firm, we have a highly diversified portfolio of investments in software companies, inclusive of real asset lending, but excluding liquid credit,” said Arougheti. “Importantly, not all software exposure is the same, since private equities are in the first-loss position and most of our senior loans are contractual yields in the 10% range, and our short duration of typically three to four years of remaining maturity.”
“Any time there's a material disruption in any industry, there's always two sides of the coin,” Arougheti explained. “We could see more investment opportunities in opportunistic credit and secondaries, and an acceleration in AI adoption should drive digital infrastructure opportunities.”
We are also exploring the potential of using AI solutions in portfolio companies to augment products, creating additional software tools and modules to add to existing infrastructure. This may produce cost efficiency and productivity gains across the portfolio.
Periods of dislocation can create new investment opportunities with attractive relative value for well-capitalized managers at a time when public market alternatives will retrench. This will very likely put a spread premium on the ability to underwrite the current software landscape and allow pricing to reward prudent portfolio management.
Please note that we published this article following ARCC and ARES earnings on February 5, 2026. The quotes are selective extracts from our earnings calls.
