PennantPark estimates that only ~4.7% of its portfolio is invested in software and technology, reflecting longstanding underwriting discipline rather than recent market shifts.
Crowded market dynamics, higher leverage, ARR-based underwriting, increased use of PIK loans, and AI-driven uncertainty have reinforced our prudent approach to software credit.
Where we do participate, our software investments are primarily mission critical, vertical businesses with durable cash flows, regulated end markets, conservative capital structures, and strong downside protections.
Recent market volatility has renewed investor scrutiny around private credit’s exposure to software and technology companies. As public software equities have sold off and concerns around artificial intelligence (“AI”) disruption have intensified, attention has increasingly turned to private credit portfolios, where software borrowers represent a meaningful share of deal flow and portfolio exposure, particularly in the upper end of the market.
Against that backdrop, PennantPark’s positioning in software and technology reflects a more deliberate and restrained approach.
Today, we estimate that only about 4.7% of PennantPark’s portfolio is invested in software and technology companies. This level of exposure is low in absolute terms and modest relative to many peers across the private credit landscape, where technology-related exposure has been meaningfully higher.
This outcome is not the result of recent market shifts. It reflects intentional portfolio construction decisions made well before software valuations and AI-related risks became front-page topics.
PennantPark has always emphasized credit quality and downside protection. For us, that means generally avoiding investments with elevated financial leverage relative to enterprise value or cash flow. This discipline alone has historically limited our exposure to software and technology companies, even before considering other sector-specific risks. The following factors have also contributed to our underweight positioning relative to peers.
First, software has become one of the most crowded sectors in private credit. Significant capital inflows have increased competition, often leading to higher valuations, more leverage, tighter pricing, and weaker lender protections like financial covenants. In our view, these dynamics reduce margin for error and limit downside protection.
Second, many technology financings have increasingly relied on annual recurring revenue (“ARR”) as the primary underwriting anchor rather than demonstrated cash flow. While recurring revenue can be informative, PennantPark remains a cash-flow-focused lender. We believe that revenue alone does not service debt if it does not convert into durable cash generation, and as a result we have generally avoided ARR-based lending structures.
Third, other lenders have increasingly used paid-in-kind (“PIK”) loans to entice borrowers and win business. In our view, PIK structures often mask underlying cash flow stress and weaken lender positioning in downside scenarios. We’ve written more extensively on this topic, but the short version is that we are consistently one of the least exposed lenders to PIK loans.
Finally, the emergence of AI has introduced new uncertainty across the software landscape. While AI is widely expected to be transformative, its impact is unlikely to be evenly distributed. Some companies may benefit meaningfully, while others may face margin pressure or displacement, particularly those with undifferentiated products, high technical debt, or limited domain defensibility. We believe this dispersion of outcomes increases underwriting risk at a time when credit terms have already weakened.
Despite our low overall exposure, we continue to have conviction in the limited number of software and technology investments that remain in our portfolio. These businesses tend to share several common characteristics:
In short, our technology exposure is concentrated in businesses where software functions as essential infrastructure, with durable cash flows and clear downside protection.
From a credit perspective, our software and technology investments exhibit the same tight underwriting standards as the rest of our portfolio. Across our 10 active investments in this industry, the average net leverage multiple is 5.3x, average loan-to-value ratio is 39%, average remaining maturity is 2.9 years, only one loan has a partial PIK component, and all loans have financial covenants.
AI-driven disruption has prompted a reassessment of long-held assumptions about software durability and defensibility. While we agree that the picture is nuanced and that certain enterprise software businesses remain resilient, we believe broad exposure to the sector at today’s valuations and loan structures warrants caution.
PennantPark’s comparatively low software and technology exposure reflects a preference for avoiding crowded trades, maintaining structural discipline, and prioritizing downside protection. Rather than stretching on valuation or underwriting standards to maintain sector exposure, we have chosen to remain selective and patient.
Private credit is not a monolith, and neither is software. As these dynamics continue to evolve, we believe differentiation at the credit level will matter more than ever. Our approach has been to stay below the fray, emphasize cash flow and structure, and align the portfolio with our longstanding focus on capital preservation and risk-adjusted returns.
We welcome a conversation; please contact invest@pennantpark.com or the professionals listed below.
PennantPark was founded in 2007 as an independent middle market credit platform. The firm was founded by Art Penn, a private credit industry veteran that previously co-founded Apollo Investment Management. We have invested over $26 billion across multiple economic and credit cycles since inception, and we manage $10 billion in AUM today.[i] PennantPark serves a broad range of sophisticated investors with product offerings that include business development companies, private capital funds, joint ventures, and other specialized funds.
Our highly experienced team primarily invests in the core middle market, targeting companies with earnings of $10 million to $50 million. These mid-sized companies are often overlooked by banks and large investment managers, resulting in senior secured loans that generally feature higher yields, lower leverage, and stronger lender protections when compared to the upper middle market and broadly syndicated loans. We focus on five key industry verticals where our track record is excellent and where we have the most expertise and experience. These industries include healthcare, government services, business services, consumer, and software & technology.
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