From Goldman Sachs to Blackstone, Wall Street giants are all backing it: software will not fail

In response to the recent heavy sell-off in the software sector driven by threats of artificial intelligence (AI), senior executives at major Wall Street financial institutions are attempting to send a clear message to investors: The rumors of the software industry’s demise have been greatly exaggerated.

Last week, following the announcement of new tools by AI startup Anthropic, shares of software giants like Salesforce and Adobe plummeted, erasing hundreds of billions of dollars in market value. Market panic spread, with investors worried that AI would replace traditional software functions, thereby destroying the business models of the industry.

In response, executives from Goldman Sachs, Blackstone, Apollo Global Management, and KKR issued intensive statements this week. They pointed out that the current market reaction is a “blinded” sell-off, and while AI will indeed bring disruption, the view that all software companies will become obsolete is overly broad and lacking basis.

While calming market sentiment, these Wall Street giants are also doing their best to downplay their own risk exposure in the software sector. They emphasized that although the software industry has long been a hot target for private equity investments, its diversified portfolios are sufficient to withstand sector-specific volatility, and some institutions have already adjusted their holdings in advance.

“Intense technological cycles” and the question of pricing power

Although the overall tone is reassuring, industry leaders do not deny the transformative changes ahead. John Zito, Co-President of Apollo Asset Management, stated in an interview with CNBC on Wednesday that the software industry will not disappear, but its business logic will change.

“No one at Apollo believes software will vanish. In fact, we actually think the usage of software will increase significantly,” Zito said, “The only question is—how much are you willing to pay for it?”

Zito warned that the market will go through a “very intense technological cycle,” with winners and losers emerging. He particularly cautioned investors not to judge the prospects of software companies solely based on current revenue figures, as their performance now is still decent. He used a vivid analogy: “It’s like saying BlackBerry would still do well when the iPhone 1 was launched.”

The root of panic: AI’s impact on subscription models

The immediate trigger for this market panic was Anthropic’s announcement of a new legal tool for its Cowork assistant, designed to assist with drafting and research tasks. This news sparked investor concerns about the fate of various software providers, leading to a sharp drop in Salesforce and Adobe’s stock prices last week, which continued into Wednesday.

Before Anthropic’s announcement, investors were already uneasy about the potential disruption of industries by the hundreds of billions flowing into AI. Software companies are viewed as particularly vulnerable targets because they typically generate revenue through subscriptions and licensing fees.

For years, software businesses have been considered high-quality assets by private equity firms and lenders due to their high profit margins and stable recurring revenue. If these software company valuations continue to plummet, it could mean significant losses for these investment institutions.

Differentiated approach: Opportunities within the “blinded” sell-off

In the face of the overall sector decline, Blackstone CFO Michael Chae believes the market reaction is irrational. He stated at the US Bank conference on Tuesday that although recent transactions targeting the sector have been “indiscriminate,” results will eventually diverge over time.

“We expect larger, more established companies to be better protected, and in many cases, they will benefit from AI,” Chae said. He emphasized that the market should not broadly dismiss all software assets.

Goldman Sachs CEO David Solomon also expressed a similar view at the UBS conference on Tuesday. He acknowledged that the firm expects AI to disrupt the market but believes that “the narrative over the past week has been somewhat too broad.”

Big players safeguarding themselves: risk exposure “negligible”

While defending the industry, these institutions are also reassuring investors about their own safety.

KKR CFO Robert Lewin stated earlier this week at the UBS conference that the diversification of large asset management firms’ investments will help protect them from AI disruption. He revealed that KKR has about 15% of its private equity investments exposed to software companies, accounting for roughly 7% of its total assets.

Lewin also pointed out that the firm recognizes the risks brought by AI applications and has sold some businesses in recent years.

Goldman Sachs’ David Solomon was more direct in downplaying the risk, stating that Goldman’s risk exposure in software investments is “insignificant relative to our overall platform size.”

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