Warnings about heavy borrowing across the software sector are growing louder as higher interest costs collide with slowing growth. Investors who piled into debt-backed deals during the zero-rate era now face a tighter market, tougher refinancing, and rising default risk. The stakes are high for founders, employees, lenders, and customers who rely on mission-critical tools.
“Their leveraged bets on the software industry may soon cause big trouble.”
The concern centers on buyouts and growth rounds structured with large debt loads. Many were priced on aggressive revenue forecasts and easy credit. That playbook is harder to sustain as cash becomes more expensive and sales cycles stretch.
How the boom set the stage
From 2020 to 2021, cheap money and strong demand lifted software valuations. Investors leaned on recurring revenue and high gross margins to justify larger loans. Private equity sponsors stitched together roll-ups, while late-stage funds used leverage to speed expansion.
Loan structures often featured fewer covenants and interest rates tied to floating benchmarks. That looked safe when rates were near zero. It looks different after rapid hikes and a reset in valuation multiples.
Many companies now carry debt sized for yesterday’s growth and pricing. Refinancing could be difficult if revenue and cash flow have not kept pace.
Where stress is building
Three pressure points stand out as rates stay elevated and buyers grow more selective.
- Refinancing walls in the next two years could force higher coupons or new equity.
- Covenant pressure may rise if growth slows and cost cuts fade.
- Exit markets are tighter, limiting sales or IPOs at prior valuations.
Cash burn is less tolerated. Lenders and boards want clear paths to free cash flow. That often means layoffs, product pruning, and price increases, which can hit morale and customer loyalty.
Why software is both resilient and exposed
Recurring revenue and sticky products still help. Many customers rely on these tools to run payroll, billing, security, and analytics. Churn can be low even in weaker markets.
But resilience has limits. Expansion revenue has cooled as clients reduce seats, delay upgrades, or consolidate vendors. Sales cycles have lengthened in enterprise accounts. Discounting is back, and pilots last longer.
For highly leveraged firms, small misses on growth or margins can strain interest coverage. A few quarters of underperformance can trigger a liquidity squeeze.
Winners, losers, and what comes next
Not every leveraged bet will unwind. Strong operators with clean books, durable retention, and efficient go-to-market teams can manage higher rates. They may even gain share as weaker rivals retrench.
Sponsors with patient capital are pushing for operational fixes rather than quick flips. That includes stricter budgeting, tighter pricing discipline, and focused product roadmaps. Some are pursuing tuck-in deals at lower prices to expand offerings without overpaying.
Yet consolidation will likely create casualties. Distressed sales, loan-to-own outcomes, and carve-outs are expected to rise. Credit funds with workout experience are preparing for amendments and restructurings.
Signals to watch
Several indicators can help gauge whether trouble will spread or stay contained:
- Refinancing volumes and pricing for software borrowers with floating-rate debt.
- Trends in net revenue retention, especially in mid-market and enterprise tiers.
- Layoff announcements tied to interest costs or lender pressure.
- Growth in covenant amendments and payment-in-kind features.
- Secondary market pricing for leveraged loans tied to software issuers.
What companies and investors can do
Advisers recommend an unglamorous focus on cash. That means defending gross margins, removing underused features, and ending unprofitable go-to-market motions. Renegotiating vendor contracts and real estate can free funds for product and support.
Boards are asking for frequent liquidity updates and fast scenario planning. Sensitivity tests on churn, pricing, and sales capacity help flag weak spots before they become crises. For some, swapping growth targets for cash flow goals is the only viable path.
Investors are also revisiting underwriting methods. They are weighting retention, cash conversion, and unit economics over headline growth rates. Debt packages are smaller and priced for risk, with tighter terms.
The message is clear. Leverage still works when growth is steady and predictable. It can turn from tool to trap when conditions shift. The next wave of refinancings will show who prepared in time.
For now, software’s core strengths remain intact, but the margin for error has narrowed. If rates stay high and demand stays uneven, more restructurings seem likely. If inflation cools and confidence returns, stronger operators could emerge with leaner cost bases and cleaner balance sheets. Either way, cash discipline and honest planning will decide outcomes.
