No Salvage Value

Jim Feldkamp · Managing Partner, Alary Capital · August 2026

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When a software loan turns, there is no collateral to liquidate toward: enterprise value is recurring revenue carried on confidence, and it recovers, or does not, on decisions made before any process starts. This paper is about why recoveries from credit-stressed, middle-market software are disappointing, what waiting costs the claim, and the underwriting discipline that changes the outcome.

1. The argument in brief

Start from the lender’s seat. When a sponsor-backed software company comes under credit stress, the parties hold different positions, the lender a claim, the sponsor an option, the management team a company, but they share one interest: a recovery that lands. For most of these credits that means a sale that closes. The striking fact of this market is that sales are not closing. As of June 30, 2026, private equity firms held 33,575 unsold companies worldwide, up from 32,451 at year-end 2025 and 15,923 a decade ago, the third consecutive annual increase.¹

This paper makes three claims. First, software is a different kind of collateral. There is no salvage value underneath it: enterprise value is recurring revenue carried on confidence, and when the confidence goes, value does not decline, it evaporates, which is why the recovery question must be answered earlier in software than in any asset-backed workout. Second, the backlog is structural, not cyclical: every exit channel narrowed at once, and the instruments that replaced them defer the sale rather than complete it, which is why waiting is not a recovery strategy. Third, and least priced by the market: for a credit-stressed company, the sale process itself is the scarcest asset. A company gets one credible trip to market, and its owners get one exit from it. Fail that process and every later one starts from the broken-process discount, the price the market charges a company that has been shopped and did not sell. We call this the one-exit problem, and in the lender’s units it reads simply: a failed process is a failed recovery, and the mark that follows it is permanent.

The conclusion follows from the claims. When the loan was made, someone underwrote it: a model, a downside case, covenants, a committee, a signature. When the credit turns and a recovery path must be chosen, almost no one underwrites the recovery. The decision that determines the lender’s outcome and the sponsor’s residual is made on a teaser, a fee letter and hope. The discipline that private credit applies to origination should be applied to the recovery, before the process starts, while the answer can still change the outcome.

2. The backlog: a market that stopped clearing

Start with the count. PitchBook’s mid-year data put 13,509 sponsor-owned companies in the United States alone.² Against a US exit pace of roughly 1,500 companies a year (1,619 exits in 2025; 764 in the first half of 2026), that is more than eight years of inventory at the current rate, by PitchBook’s own arithmetic.³ The queue is measured in years, not quarters, and it is still lengthening: the second quarter’s US exit value roughly halved from the first.²

The companies in the queue are aging. The median US company exited this year had been held 6.4 years; the share of portfolio companies held five years or longer is at its highest in nearly a decade.⁴ FTI Consulting counts roughly 1,400 investments above the historical norm, about 11% of the US inventory, and finds retention of the 2021 and 2022 cohorts, the companies bought at the top, the highest of any vintage since 2004. Those large buyouts were done at a record ~13x EBITDA, against a historical band of 9x to 11x.⁵ The math of that gap is the backlog in one line: assets priced for a market that no longer exists, held by owners who cannot yet afford to crystallize the difference.

The cost of holding is now visible in returns. From July 2022 through March 2026, US private equity returned 6.4% annualized against 15.2% for the S&P 500 and 19.3% for the Nasdaq.⁶ An asset class built on a premium to public markets has spent nearly four years earning a discount, and the difference is, in large part, the backlog: capital parked in companies that were supposed to have been sold.

The people closest to the market describe it plainly. John Maldonado of Advent International: “Buyers and sellers still have too big of a valuation gap.” Elizabeth Cooper, who leads private equity at Simpson Thacher: “Everything basically got reset.” Andrew Milgram of Marblegate, on the companies themselves: they “failed to fulfill their value promise.”¹

3. Every exit channel narrowed at once

A backlog this size requires more than one door to close, and every door closed together.

The IPO window. Since 2022 there have been 70 sponsor-backed IPOs on US exchanges, against 424 in the five years before.⁷ Listings have picked up modestly this year, but the route remains reserved for the largest and cleanest assets. It is not an exit channel for a credit-stressed middle-market software company; it never was.

The sponsor-to-sponsor trade. The workhorse of the last decade has stalled outright. In the second quarter of 2026, US sponsor-to-sponsor exits fell 57% from the prior quarter to $24.5B across 94 deals, the lowest quarterly count in at least a decade. Sales to corporate acquirers fell 63% over the same quarter.⁸ The marginal buyer of a sponsor-backed company was always another sponsor, and that buyer now has the same problem as the seller: a portfolio it cannot exit and limited appetite to add more.

What grew instead: engineered liquidity. The secondary market cleared more than $120B in the first half of 2026, a record, and GP-led deals were more than half of it; continuation funds were 86% of GP-led deal count.⁹ NAV lending, borrowing against the portfolio to fund distributions, deployed an estimated $70B in 2025.¹⁰ These tools have real uses. But for a stressed company they are deferral priced as progress: the same asset, the same unanswered question, moved to a new vehicle with more leverage and a second layer of fees. A continuation fund does not answer whether the company can sell. It postpones the date on which someone must find out, and the claim ages while it waits.

The sponsors themselves say the quiet part in earnings language. Apollo, reporting principal investing income of $16M in the second quarter against $75M in the first, told investors asset sales had been “prudently delayed” while conditions are “less accommodative for monetization activity.”¹¹ Delay is now the reported strategy. The question this paper takes up is what delay costs, and who pays it.

4. Software is the hard case

Begin with what the collateral is. A lender to an industrial borrower recovers through assets: inventory, receivables, machines, real estate, things with residual value at a liquidation. A software company has none of that. Its enterprise value is recurring revenue, and recurring revenue is confidence: customers renewing, engineers staying. There is no salvage value to liquidate toward, and when the confidence goes, value does not decline, it evaporates. Every workout convention built for asset-backed credit, wait for the covenant, send in the advisor, force the sale, was designed for collateral that holds its value while decisions are made. Software collateral does not wait. That is this paper’s title, and the sector’s four other problems compound it.

The multiple reset is the steepest of any sector

At the 2021 peak, the median public SaaS company traded at roughly 18x to 19x revenue, and the median private SaaS acquisition cleared at 6.4x. As of mid-2026 the public SaaS median is 3.2x trailing revenue, down from 5.7x just a year earlier, and the private deal median is near 3.1x.¹² This is not a dip below trend; it is a return to the decade’s norm from an extraordinary peak. The companies bought at that peak, at record prices, are the cohort their owners least want to bring to market, because a sale converts a paper mark into a realized loss.

The 2021 vintage carries a second, quieter feature: its debt. The landmark software take-privates were financed with ARR-based unitranches, loans underwritten to recurring revenue rather than earnings, on the theory that growth would produce the EBITDA later. Those structures convert to conventional EBITDA covenants two to four years after closing.¹³ “Later” is now. Companies that grew into neither their multiple nor their covenants are meeting both at once.

Private credit is concentrated in exactly this cohort

Software is the largest single sector in direct lending. The Bank for International Settlements counts more than $500B of loans to SaaS companies, about 19% of all direct loans; the Boston Fed finds internet and software near 20% of the median BDC portfolio, the largest sector exposure, with some lenders above a third.¹⁴ A Wall Street Journal analysis this spring argued the true figure at several large funds is closer to a quarter once reclassified borrowers are counted.¹⁵

And the sector’s credit is deteriorating in the aggregate data. Fitch’s US private credit default rate hit a record 6.0% for the twelve months through June.¹⁶ Lincoln International’s valuation work shows 11% of private credit loans paid interest in kind during 2025, up from 7% in 2021, and that 56% of that PIK was added after closing, the signature of a borrower that stopped being able to pay cash. Covenant defaults ran ~3% a quarter and lenders processed more than 875 amendments in a year.¹⁷ The Boston Fed reads the same tape: the PIK share of BDC loan books has roughly climbed from 6% to 10% in three years, while spreads compressed.¹⁸ Investors have noticed; in the second quarter they asked private credit funds for $15.6B back and received $5.9B.¹⁹ David Golub’s summary is the honest one: “We are clearly in a credit cycle. It’s not a particularly bad one, but there will be winners and losers.”¹⁹

The visible artifact: amend-and-extend

When a software LBO cannot refinance at par and cannot sell at its mark, the observable event is an amendment. The wave is now public. Thoma Bravo’s Proofpoint closed a $5B extension in late July only after lenders forced better pricing and tighter covenants.²⁰ Blackstone’s Ancestry lined up $2.25B to push out 2027 maturities, sweetening terms to fill the book.²¹ Imprivata launched what CreditSights called the start of “an anticipated wave of software A&Es.”²² At Solera, lenders including Apollo and PIMCO organized a cooperation pact before the 2028 maturities even arrived.²³ And when extension fails, the equity goes: Medallia, a $6.4B purchase in 2021, was reportedly handed to its lenders this spring.²⁴ Each of these is the same sentence written in loan documents: the exit did not come, so the debt must wait. For the lender, each is also a decision about the recovery, made without the one analysis that would price it.

There are buyers. They are just not buying this.

It would be wrong to say software M&A is dead. Deal count is at a record; the twelve months through June saw 2,784 SaaS transactions, most of them small and vertically focused add-ons.¹² Mega take-privates are back: Electronic Arts at $55B, Dayforce at $12.3B, and in mid-August, reports of Silver Lake in talks to take Workday private.²⁵ But look at what clears: profitable, large, moderately priced assets, and small tuck-ins. The middle is empty. Tech buyout volume fell 78% year over year in the first half, and US software platform buyouts are tracking toward a decade low, roughly $39B annualized against $156B in 2025.²⁶ One software banker described sponsors’ posture toward the sector as “a bit like getting punched in the gut. You lose your breath for a period of time and are cautious about going back.”²⁷

Over all of it hangs the AI question. Bain measured an 8% decline in software valuations in the first quarter of 2026 alone and named AI disruption one leg of the year’s “triple shock.”²⁸ Vista has publicly moved its benchmark from the Rule of 40 to a “Rule of 60.”²⁹ Buyers now screen every software asset on valuation, durability of growth, and AI exposure before a management meeting is granted.²⁷ None of this means a given company cannot sell. It means the burden of proof has moved to the seller, and the proof must survive diligence.

5. The cost of delay compounds quietly

The standard response to all of the above is to wait. Wait for rates, wait for the AI narrative to settle, wait for the mark to age into plausibility. Waiting feels free because nothing happens on the day you choose it. It is not free. It is a trade, and it has a price that compounds.

Consider what a year of waiting buys a credit-stressed software company. Another year of PIK accruing above the equity. Another year of customer attrition on a product whose roadmap is frozen. Another audit cycle, another set of departures among the employees a buyer would have wanted to keep, another year for the AI question to harden from a diligence topic into a discount. The mark stays flat; the company underneath it does not. This is the distinction we press on every owner we meet: time-to-market versus time-to-cash. The fastest route to market, the quick launch with the unexamined story, is routinely the slowest path to cash, because it produces a process that stalls in diligence. But the inverse error is just as expensive: the open-ended hold, the fourth amendment, the wait for a better market that is not coming on any schedule the loan can survive. The discipline that serves every party is neither haste nor drift. It is knowing, before the process starts, what the company can actually achieve in the market, and acting on that knowledge at once.

Follow the mechanics of one more amendment and the trade prices itself. The amendment converts cash interest to PIK; the PIK compounds above the equity; the compounding raises the payoff the eventual sale must clear; the higher hurdle narrows the field of buyers who can meet it; the narrower field weakens the process the amendment was meant to protect. This is the cost of delay: the wait raises the very bar it was taken to avoid. Sponsors defer because a sale crystallizes the mark. Lenders defer because an amendment defers the loss. Bankers rarely argue for waiting, but they are paid on the attempt, not the outcome, so the corrective conversation, whether this company can sell at all, tends not to happen anywhere. Every seat at the table has a private reason to let the quarter pass, and the company pays for all of them.

The lender’s version of this cost is now on a quarterly clock. Watchlist and nonaccrual disclosures at listed funds are public, and at multi-year highs in the aggregate.¹⁹ Every quarter a stressed name stays unresolved, it migrates toward the disclosure that invites the hardest questions, and the redemption data suggest investors are already asking them.¹⁹ The choice the market actually offers is not between selling now and selling later at a better price. It is between discipline and drift: between a recovery run on evidence and a timetable, and a hold with no thesis except hope for a different market. The least costly quarter to act is the one before the disclosure, not the one after.

6. The one-exit problem

Here is the fact the market prices worst. A distressed software company gets one credible sale process. Not because a second is forbidden, but because a second is different in kind: it begins with the buyer’s first question, why is this back?

Processes die in diligence, and they are dying there more often. In Axial’s study of broken lower-middle-market deals, 46.6% of collapsed LOIs died on diligence findings, and the share killed specifically by quality-of-earnings discrepancies doubled between 2023 and 2025.³⁰ Two-thirds of GPs told Investec they had seen more broken processes than in prior years.³¹ Nearly three-quarters of senior M&A executives expect diligence to get more complex still, and most of those seeing delays report one to three months added to timelines.³² For a software target, the examination now runs from revenue recognition and net retention through security posture to the AI resilience of the product itself. A defect the seller could have found in month one surfaces in month five, at maximum leverage for the buyer and maximum fatigue for everyone else.

A failed process is not a private event. Bankers talk, buyers compare notes, and the company re-enters the market wearing the failure. No index publishes the broken-process discount; it shows up instead in who declines to bid, in the retrade, in the financing that gets harder. The market prices the failed process, not the company. For the lender the translation is exact: a failed process is a failed recovery, and the discount it leaves behind comes out of the claim. That is why the first process is the asset, and why spending it on hope is the most expensive decision in this market. As one PE chief executive put it this summer: “Hope is not necessarily reality.”²⁷

The one-exit problem reads differently from each seat, which is precisely why it aligns them. For the credit fund, the failed process converts a watchlist name into a workout, and the recovery model loses its best branch. For the sponsor, it converts a stale mark into a public event that follows the fund into its next raise. For the management team, it costs a year of running two jobs, selling the company and operating it, and ends with both jobs harder. None of these parties profits from the others’ failure. The sale that closes is the only outcome in which every position improves at once, which is what makes the first, unspent process a shared asset rather than one party’s option.

7. Underwrite the recovery like the loan

Everything above converges on one asymmetry. The loan that sits on the fund’s book was underwritten: modeled, stress-tested, papered, approved by a committee that could say no. The recovery that now determines that loan’s outcome is, at most firms, not underwritten at all. A path is chosen, forbear, extend, operate, sell, on an advisor’s cash flow, a banker’s market read, a hopeful CIM, and a fee structure that pays on the attempt.

Underwriting the recovery starts with the objective, because best recovery is not one number. On one loan it is speed: out by quarter end, flexible on the mark. On another it is maximum value, with the patience to earn it. On most it is the honest question of which of the two the credit can actually support. The lender sets the objective; the underwriting prices the paths against it. Concretely, that means answering with evidence, before anyone goes to market, four straight answers: what the company is actually worth; who actually buys it, by name, and why; what has to be fixed before diligence finds it; and how long that takes. It means producing the fix list: every defect a buyer’s diligence would surface, priced in enterprise-value terms, ordered by what each is worth at exit, and worked down against a committed launch date. It means a two-scenario recovery analysis, what a sale supports prepared against what it supports as-is, so speed and value are priced against each other rather than argued about. And sometimes it means the no-go call: the finding that the company, as it stands, should not go to market, together with exactly what would change the answer and the recovery options that remain: a sale as-is prepared in weeks, an operating stabilization, or, where the company will not sell as a going concern, an honest salvage plan for the collateral. The no-go call is the honesty proof of the whole discipline.

This is not process for its own sake. Underwriting the recovery is how the one-exit problem is solved in advance: the defects are found by the seller’s own diligence instead of the buyer’s; the buyer list is real before the launch decision is made; the process, when it launches, is built to close on the first trip. Where circumstances warrant, the same underwriting supports a dual-track, with a sale run alongside a refinancing or restructuring so the company is never negotiating from a single option. The smooth sale, the process that closes on schedule at a defensible price, is not a market outcome. It is a prepared one, and for the lender it is the recovery itself. The smooth sale is the fast one, and it is underwritten before launch, not hoped for after.

8. About Alary Capital

Alary Capital works with lenders to get the best recovery from challenged, middle-market software and tech-enabled services credits, with operating capability, underwriting discipline and our own capital, deployed in whatever order the recovery requires. We work two ways: as an investor that bids, and as an operating partner paid on the recovery it produces. Both start with the same underwriting, and the lender chooses which seat we take on a company, in writing, as part of the engagement: a bid from us where the company fits our mandate, or an operating partner with no bid.

The way in is staged, and each stage earns the next. The portfolio watch is a standing screen across the lender’s watchlist, run on the reporting they already hold, with no name designated and nothing signaled to the market. The first read takes one name for two to three weeks, largely off the reporting the lender already holds: what recovery range does this credit support, and is a full underwriting worth buying. Exit underwriting is the full diagnostic, delivered before the process starts: the four straight answers, the fix list, the two-scenario recovery analysis, and a go, no-go, or sell-as-is conclusion. Where the lender has asked for it and the company fits our mandate, our bid at the supported price arrives with the report. Where the answer is go, we work the fix list with the company against a committed launch date. The economics follow the work: fixed for the reads and the underwriting, the same fee whatever they conclude; time-based for the operating and preparation work, with the larger part of what we can earn tied to the recovery the lender sets.

You set the recovery objective. We underwrite the path to it.

Jim Feldkamp, Managing Partner, Alary Capital · info@alarycapital.com

Sources and notes

Market data as of August 17, 2026. Figures are aggregate, publicly reported data; where a figure is an estimate or a press-reported computation, the note says so.

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