Executive Summary

The enterprise software sector has experienced one of its most severe re-pricings in two decades. The iShares Expanded Tech-Software ETF (IGV) lost approximately 30% from its September 2025 peak in just six trading sessions, erasing more than $830 billion in aggregate market capitalisation.

The prevailing narrative blames AI-driven obsolescence. That narrative is incomplete.

Carlsquare’s Spring 2026 sector report identifies six distinct structural drivers behind the sell-off and shows why the public market’s sector-wide verdict obscures a far more nuanced reality. The businesses that will define the next cycle of software value creation are not disappearing. They are pulling away from weaker peers at an accelerating rate.

What Is Actually Driving the Software Sell-Off?

AI-related disruption accounts for approximately 30–40% of the public-market sell-off. The remainder reflects five structural forces including a decade-long revenue deceleration, the collapse of seat-based licensing, budget reallocation toward AI infrastructure, geopolitical instability, and rate-driven multiple compression that were reshaping the sector long before large language models became enterprise-grade.

Conflating cause and catalyst leads to mispriced assets on both sides of a transaction. The full report breaks down each driver and its implications for private M&A underwriting.

Anatomy of the Sell-Off: Six Causes, One Brush

Analyzing the public market SaaS sell-off across six distinct drivers:

1. Interest Rate & Multiple Compression
   Macro-driven and indiscriminate; valuations were fragile and re-priced rapidly as rates rose.
2. Seat-Based Licensing Crisis
   Structural, not cyclical; consolidation and workforce reduction reduced seat counts and pushed vendors into discounting.
3. AI Disruption Narrative
   Real but overstated; AI differentiates businesses by moat depth, not “AI label.” Horizontal vendors with weaker moats are most exposed.
4. Pre-existing Revenue Deceleration
   Structural slowdown predates AI; median growth rates declined quarter after quarter through 2021–2025.
5. Budget Reallocation to AI Infrastructure
   Demand redistribution (not destruction): AI infra spend absorbs an increasing share of enterprise IT budgets.
6. Geopolitical Instability
   Deal timelines lengthen and operating cost assumptions shift under volatility; uncertainty compresses multiples further.

Where the Sector-Wide Verdict Gets it Wrong

The damage is concentrated, not universal
Vertical SaaS continues to outpace broad horizontal platforms. In private deal flow, high-quality vertical businesses do not show demand deterioration consistent with the magnitude of public multiple compression.

Growth deceleration preceded AI
AI became a compelling explanation for a re-rating that fundamentals had already justified. Conflating cause and catalyst leads to mispriced assets and imprecise underwriting.

Moat destruction is real — but highly selective
LLMs can dismantle parts of classic moats (interfaces, public-data workflow logic, talent scarcity, bundling), while leaving core moats intact: proprietary data, regulatory lock‑in, embedded network effects, transaction-level integration, system‑of‑record status.
Identifying which side of that divide a target sits on is now the central diligence question.

SaaS Subsectors with Structural Tailwinds

Subsector	Why AI is an Accelerant, Not a Threat
Healthcare IT	Certification, audit trails, long implementations; AI copilots extend incumbents’ leads without displacement risk
Compliance & RegTech	Governance, explainability, and auditability requirements favor incumbents; AI expands automatable surface area
ERP & Supply Chain	Deep system-of-record integration; AI drives upsell while reinforcing workflow lock-in
DevOps & Cloud Infrastructure Data Software	Every AI workload must be built/deployed/monitored/secured; demand scales with AI deployment activity
Proprietary-Data Verticals	Irreplaceable datasets increase willingness-to-pay as AI competes to query them
Built World & Construction Tech	Large GDP exposure + low digitization; jobsite/workflow data is inherently proprietary; selection matters
AI-Native Vertical SaaS	LLM-first workflows expand TAM by automating categories previously too expensive to address

What Are Acquirers Actually Paying?

Strategic and financial acquirers including KKR, IBM, Mastercard, Blackstone, Vista Equity Partners, Synopsys, and Alphabet have continued to pay revenue multiples of 7x to 32x for software businesses with structural moats, even amid the broader repricing.

The full report includes a detailed transaction table and public comparable benchmarking across 16 SaaS subsectors.

Interested in Strategic M&A, Financing, or a Software AI Readiness Assessment?

Carlsquare advises founders, shareholders, and corporates on M&A, IPO readiness, growth equity, and debt across enterprise software and technology. We support clients in translating AI disruption risk into category-specific strategy, including positioning, valuation narrative, buyer outreach, and diligence preparation.