Private Equity's Software Gold Rush Meets Its AI Reckoning

For the past decade, private equity had found its perfect investment: software companies. Predictable monthly subscriptions, sticky customers, and margins that made oil barons jealous. It was supposed to be easy money.

Then ChatGPT happened.

Now PE firms are staring at portfolio companies whose $500-per-month software tools are being outperformed by free AI assistants. The gold rush is over, and the hangover is brutal.

The Software Love Affair

PE's obsession with software made perfect sense. SaaS companies offered everything investors craved: recurring revenue, low customer churn, and scalable margins. Unlike manufacturing or retail, there was no inventory to manage, no supply chains to worry about.

Firms like Vista Equity Partners and Thoma Bravo built empires buying software companies, cutting costs, and jacking up prices. The playbook was simple: acquire, optimize, exit. Rinse and repeat.

The strategy worked so well that everyone piled in. Software valuations soared to 30-40x earnings as PE firms bid against each other. But the party couldn't last forever.

When AI Crashed the Party

OpenAI's November 2022 launch of ChatGPT didn't just introduce a new tool—it rewrote the rules. Suddenly, AI could write code, handle customer service, and perform complex analysis in minutes, not months.

Customers started asking uncomfortable questions: "Why am I paying $200 per user per month for project management software when AI can organize my work for free?"

The implications hit fast. Software companies that had enjoyed 90%+ gross margins suddenly faced existential questions about their value proposition. Worse, staying competitive now required massive investments in AI infrastructure—exactly the opposite of software's traditionally capital-light model.

Winners and Losers Emerge

The PE portfolio companies split into two camps. Those that successfully integrated AI into their offerings found they could charge premium prices for AI-enhanced features. Salesforce, for instance, commands higher fees for its AI-powered Einstein tools.

But companies offering basic automation or simple workflows got crushed. Why pay for basic CRM software when HubSpot's AI can do it better? Why use expensive analytics tools when ChatGPT can analyze your data?

PE returns reflected this divide. Funds that had projected 15-20% IRRs are now posting single-digit returns. Some are writing down investments entirely.

The Ripple Effect Reaches Your Wallet

This isn't just a PE problem—it's everyone's problem. Pension funds, university endowments, and insurance companies have $2.5 trillion invested in PE globally. When PE software bets go bad, retirees feel it.

Even individual investors aren't immune. Many mutual funds and ETFs have indirect PE exposure. That "diversified" portfolio might be more concentrated in AI-disrupted software than you think.

The bigger concern? This is just the beginning. AI capabilities are accelerating, and more software categories will face disruption. Customer service platforms, basic analytics tools, and simple automation software are all in the crosshairs.

The New Investment Reality

Some PE firms are adapting. They're either doubling down on AI-native companies or helping portfolio companies transform. But transformation requires capital—lots of it. The days of buying software companies and cutting costs to boost returns are over.

The successful PE firms of tomorrow will need to understand technology, not just financial engineering. They'll need to spot AI disruption before it happens, not after.