‘SaaSpocalypse’ Risk From AI Reaches Beyond Private Equity

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News.
This is Bloomberg Businessweek Daily, reporting from the magazine that helps global leaders stay ahead, with insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily podcast with Carol Massar and Tim Stenovec. On Bloomberg Radio.

**Carol Massar** (0:32)
Well, it is the money issue from the Bloomberg Markets magazine team. One story we wanted to bring to all of you, it really seems fitting with some of the bigger narratives that are going on. It's about how artificial intelligence looms over software companies and the investors, Tim, who piled into them.

**Tim Stenovec** (0:47)
More specifically, the buyout funds and the lenders who were drawn to reliable revenue and low costs are now facing an entire business model that is at risk. Here to explain is Paula Seligson, Bloomberg News Senior Reporter. She covers private credit and leverage finance. She joins us here in the Bloomberg Businessweek studio. Congratulations on this story. We talk a lot about the SaaSpocalypse, but this is really a deep dive into leverage buyouts and what initially was so attractive to some of these private equity firms about software. That's where I want to start because there was this joke like, that's software margins. The margins on these companies for so long was so high and that was part of the attraction.

**Paula Seligson** (1:24)
Absolutely, because the better the margins, the more debt you can load it up with. The whole basically private equity business model is to use debt to lever up a company when they buy it. The debt is not borrowed by the private equity firm. The debt is borrowed by the target company being acquired.

**Tim Stenovec** (1:40)
Please repeat that last part because that is a really crucial point when it comes to a leverage buyout.

**Carol Massar** (1:44)
Isn't that a classic private equity also move?

**Paula Seligson** (1:48)
Yeah, exactly. This is how private equity makes so much money. It's through leverage, but the key thing is that the private equity firm is not on the hook for that leverage. The target company is, and that's what's at stake right now.

**Carol Massar** (1:58)
Well, so let's talk about this because I think one of the things we keep thinking, is it one shoe to drop? Is it two shoes to drop? Is it a lot of shoes to drop? Because so far, it seems to be manageable. Tell us about what we are, what we've seen, but why maybe the situation or environment is changing for some of these names.

**Paula Seligson** (2:19)
Yeah, and so that's an important distinction to make. The SaaS apocalypse has not happened yet, right? This is all about the fears that it could be coming. So at the heart of it, AI technology has the potential to disrupt existing software businesses that were considered pretty much fine. And the fear is that you'll have certain types of software companies especially affected. If you are providing software that's like the infrastructure layer of a company, probably OK.
If you're doing data visualization and that's your main product, you can just plug that into Gemini or Chad GPT and those business models could be especially at risk.

**Tim Stenovec** (2:51)
Can you do that that easily?

**Paula Seligson** (2:52)
That's a fair point. And that's one of the defenses people have, which is that if you're a big corporation, you have all your employees using certain products, you're not going to have them just go off on their own and use AI.
But Claude Code has developed very rapidly and that's maybe taking the place of some products that would help software developers.

**Tim Stenovec** (3:10)
Is the concern specifically that with some of these types of services you describe and you write about, you would have internally people create some program, maybe vibe coding or use Claude Code to do this, that would replace paying for seats of certain, paying on a per seat basis for certain companies?

**Paula Seligson** (3:30)
Exactly. The fear is that even if this doesn't fully disrupt revenue, it could chip away at it, can it even just chip away at revenue growth? That's where the debt comes in.

**Tim Stenovec** (3:39)
I don't know. I'm still skeptical of the whole thing.

**Carol Massar** (3:44)
That you believe that it's going to actually work and that companies are going to entrust doing data analysis or tracking.

**Tim Stenovec** (3:50)
Part of it has to do with the pipeline of innovation at some of these companies. They're constantly iterating on their products and making their products better and better for their customers.
That's the way that it's worked. You can't just get one person within a company to replicate something that they've been paying for years.