The AI Scapegoat

The public markets are treating pure-play software stocks like they have a terminal disease, triggered by Anthropic’s recent agentic AI releases. But the latest insights from Thoma Bravo’s Holden Spaht expose a massive misdiagnosis on Wall Street.

The non-obvious reality is that AI is being used as a convenient scapegoat for a completely different financial hangover. The current volatility in software has less to do with autonomous agents replacing coders, and much more to do with macroeconomic gravity: punishing interest rates and a post-pandemic “seat indigestion.” Enterprise clients are quietly shedding the bloated SaaS subscriptions they overbought three years ago. The market is violently repricing software on fears of an AI apocalypse that simply isn’t visible in actual corporate balance sheets yet.

The Cost of a Hallucination

While AI will undeniably disrupt software, the market is painting with too broad a brush. The insight here is the dividing line between what dies and what thrives: The Cost of a Hallucination.

If a company sells generic software with simple workflows - like an app that generates marketing copy or summarizes meeting notes - they are in trouble. They lack a regulatory moat, and the cost of an AI mistake in those environments is virtually zero, making them easy targets for raw Large Language Models.

But the smart money is targeting a completely different proposition: “Zero-Tolerance-For-Error” workflows. Think about software running a hospital’s compliance protocol, a bank’s cross-border transaction ledger, or an industrial power grid. In these environments, you cannot simply swap out legacy software for an LLM, because an AI hallucination means someone goes to jail, loses millions, or dies. These companies possess deep domain expertise and embedded cross-system integration. For them, AI isn’t a competitor; it’s a powerful tailwind - a new feature they can safely sandbox and sell to their captive audience at a premium.

The Private Equity Arbitrage

This disconnect creates a brutal, structural arbitrage opportunity. While public market investors are panic-selling high-quality software companies because they misunderstand the threat vector of AI, the world’s largest private equity firms are quietly sharpening their knives. They are preparing to take the best, highly-integrated software companies private at a discount.

If you are managing a tech-heavy portfolio, stop panicking over the headline AI threat and start auditing your holdings for “switching costs” and “regulatory moats.” If your software stocks are mission-critical and deeply embedded in highly regulated industries, do not capitulate. Public markets are offering a rare, unwarranted discount on these assets. If you sell now out of misplaced AI fear, you are simply handing over generational tech monopolies to private equity at a bargain-basement price.