After the sale of the software, the panic seems to have subsided, as it is now being seen again in some parts of the market, so where are private equity investors focusing their efforts?
The future viability of software as an industry – and as an investment opportunity – was called into question earlier this year after Artificial Intelligence (AI) developer Anthropic unveiled tools it sees as potentially disrupting large parts of the industry.
The success began to shake the markets, causing the sale of software companies that went into private debt, where the sector was popular with lenders, and hit the private car listed in the US.
However, a few months later, some sectors have recovered. The software company Snowflake, for example, saw sharp sales between February and April, with the stock price in one place more than 50 percent below levels a year ago.
In June, the company was holding back, recouping most of those losses after announcing increased investment in AI, with investors now expecting it to benefit from AI-driven demand.
“There was some initial shock, but you’ve seen a lot of upside,” Anant Kumar, global investment strategist at Benefit Street Partners, told me. Another Credit Investor. “Software sold off a lot in the first quarter, but if you look at the IGV ETF, it has recouped most of its losses.”
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Regarding software companies, Kumar said there are parts of the market that are “really going to be destroyed”, some that will be disrupted in a manageable way and others that can benefit from AI. A nuance that has not yet been fully priced.
The idea that some software companies could benefit from AI has also not been ignored, according to Jakob Schramm, head of private equity at Golding Capital Partners, as the technology can improve rather than replace existing models.
“AI is also an opportunity for many software companies,” he said ACI.
Golding has a software exposure of about 10 to 15 percent, which Schramm says is unlikely to change materially. Exposure is focused on mid-market and lower mid-market firms rather than large names with high subject risk.
He added that the strongest businesses are those that are vertically integrated, data-rich and embedded in customer systems.
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Elsewhere, Jason Georgatos, president of (£755m) Partners for Growth (PFG), Jason Georgatos, said the company’s software exposure was around 15 per cent, but warned that PFG was becoming more selective, while continuing to support SaaS companies.
“We are still investing in SaaS companies despite potential disruptions, we think there are still many good reasons to support certain SaaS companies,” he said. ACI.
However, Georgatos described the creation of a software portfolio as an “ongoing debate”, with a preference for regulated and defensive areas such as healthcare and financial services, where switching costs are high.
He warned that commercialized SaaS and dashboard-style tools could be overshadowed by AI.
Meanwhile, Solomon Nevins, a partner at research firm Fund Review, said private credit’s exposure to software is unlikely to be the “end” of the asset class, but it does respond to issues of disruption. He identified IT and telecommunications services as most vulnerable to AI disruption, representing 22 percent of semi-liquid private debt funds on average.
Overall, Nevins said he has seen a gradual shift in IT exposure within private credit, but also a reclassification of other holdings.
This article originally appeared in the July issue of Alternative Credit Investor, to view this issue click here.
