Ares' Jacobson Sees Bifurcation in Software Industry

Ares Management co-president Blair Jacobson said software investors initially feared that AI would "eat" the entire sector, pressuring valuations earlier this year. Seven to nine months later, he sees a bifurcation in software markets, implying AI disruption risks and investment outcomes are increasingly company- and segment-specific rather than uniform across the industry.

Analysis

The investable implication is dispersion rather than a sector-level software beta call. AI is likely to reward platforms with proprietary workflow data, embedded distribution and pricing power (MSFT, NOW, CRM, ORCL) while compressing valuation support for point-solution vendors whose code-generation, analytics or customer-support features can be bundled by incumbents. The key near-term determinant is not AI commentary but whether net retention, seat expansion and sales-cycle duration stabilize; companies that must discount to preserve growth are most exposed to a multiple reset over the next 1-3 quarters.

For ARES, the read-through is primarily to private-credit underwriting and deployment, not immediate management-fee economics. A widening gap between durable enterprise software and commoditized applications creates refinancing and covenant risk in sponsor-backed software loans, especially where leverage was sized to pre-AI growth assumptions; conversely, it expands opportunities for Ares to provide rescue capital at wider spreads. Over 6-18 months, the strongest private-market assets should retain strategic-buyer demand, while weaker vertical SaaS portfolios may face down-rounds, delayed exits and impaired realizations.

Consensus may still be too focused on whether AI displaces "software" rather than on who captures the resulting productivity surplus. Large vendors can use AI to lower R&D and support costs while preserving pricing, whereas smaller firms may experience the opposite: higher compute costs and weaker feature differentiation. This argues against broad IGV exposure until earnings reports demonstrate that retention and free-cash-flow margins are holding across the lower-quality cohort.

Key Decisions for Investors

• No standalone directional ARES trade on this commentary; maintain a watch item ahead of quarterly earnings for private-credit deployment, non-accruals, software-related marks and management commentary on sponsor refinancing. A material rise in non-accruals or weaker fee-related earnings guidance would falsify the constructive private-credit opportunity thesis.
• Express dispersion over the next 3-6 months via long NOW or MSFT versus short IGV, sized beta-neutral. The long leg has enterprise distribution and monetization capacity; the hedge protects against a broad software multiple recovery. Exit if IGV relative performance improves while NOW/MSFT fail to convert AI demand into subscription or remaining-performance-obligation growth.
• Avoid adding to high-multiple, subscale application software until the next two earnings cycles confirm stable net revenue retention and operating-margin guidance. Particularly monitor DDOG and MDB for evidence that AI-driven workload growth exceeds pricing or competitive pressure; a guide-down in retention would make them more suitable short candidates than broad software ETFs.
• For credit books, review sponsor-backed software exposures with near-term maturities, elevated leverage and weak contractual recurring revenue. Require wider spreads or stronger covenant protection for businesses lacking proprietary data or mission-critical workflow integration; this is likely a 6-18 month underwriting risk rather than a days-to-weeks market event.