As the software sector continues to be the largest exposure for Business Development Companies (BDCs), managers are taking proactive measures to mitigate the risk posed by Artificial Intelligence (AI). According to Barclays, many BDC managers are employing various strategies to insulate their portfolios from AI-related risks. These measures may include reducing Loan-to-Value (LTV) targets, shortening loan tenors, or imposing more rapid amortization schedules on new issue loans.

• 1. Dependence on AI: Many software companies rely heavily on AI for their core operations, which can make them vulnerable to disruptions in the AI market. As AI technology continues to evolve and improve, there is a risk that these companies may struggle to adapt and maintain their competitive edge.
• 2. Cybersecurity risks: With the increasing use of AI, software companies are also at greater risk of cybersecurity threats. As AI systems become more sophisticated, they can potentially pose a greater threat to data security and privacy.
• 3. Changing business models: The rise of AI has led to changes in traditional business models, which can impact the way software companies operate and interact with their customers. This can result in new challenges for BDCs when evaluating the creditworthiness of these companies.
• 4. Regulatory risks: As AI technology becomes more prevalent, regulatory bodies may need to adapt their oversight and regulation to keep pace with the changing landscape. This could lead to increased compliance costs for software companies and potentially impact their ability to access capital markets.
• 5. Market volatility: The rapidly evolving AI market can lead to significant price fluctuations, which can affect the valuation of software companies and their exposure to BDCs. This volatility can also make it more challenging for managers to accurately assess the creditworthiness of these companies.

In response to these risks, BDC managers are taking steps to mitigate their exposure to AI-related risks in software portfolios. These measures may include:

• 1. Diversification: BDC managers may choose to diversify their portfolios by investing in a range of industries and sectors, rather than focusing solely on the software sector. This can help reduce their exposure to AI-related risks and provide a more balanced investment profile.
• 2. Credit analysis: BDC managers are likely to conduct thorough credit analyses of software companies to assess their ability to withstand potential disruptions in the AI market. This may involve evaluating the company’s financial health, management team, and industry trends.
• 3. Risk management strategies: BDC managers may adopt risk management strategies such as hedging or diversification to mitigate their exposure to AI-related risks. These strategies can help protect their investments and ensure that they are well-positioned to navigate the evolving AI landscape.
• 4. Industry collaboration: BDC managers may choose to collaborate with industry experts, regulatory bodies, and other stakeholders to stay informed about emerging trends and risks in the software sector. This can help them make more informed investment decisions and better manage their exposure to AI-related risks.