The software sector has found itself back under the spotlight as discussion around GenAI disruption gathers pace. The debate has intensified in recent weeks, after the launch of new AI‑driven tools prompted fresh questions about how quickly established workflows, currently inhabited by software companies, could shift. The accelerating pace at which foundational models are emerging has fuelled a sell-off in public software assets and scrutiny of private markets’ exposure to SaaS models, in both equity and credit.

At Hayfin, this is not a new theme. Early in 2024, we undertook an external review of GenAI‑related risk within our portfolio. Since then, we have embedded the relevant insights into day‑to‑day portfolio management and how we underwrite and invest in new opportunities. While the 2024 review didn’t point to a need for significant change across our portfolio, the result is that our exposure to the space today is deliberate, regularly measured and grounded in a clear view of where software remains resilient.

Across our Direct Lending strategy, software makes up less than 8% of fair value. It is worth recognising that, until very recently, software businesses were among the strongest performers in many institutional portfolios, and for a large number of these companies, the core fundamentals have not changed – they remain well‑run, cash‑generative assets with attractive return profiles. Performance across the software businesses within our portfolio remains in line with expectations. More importantly, this reflects the focus of our exposure: mission‑critical, workflow‑embedded software rather than content generation tools or basic analytics tools or platforms.

These companies sit deeper in customer processes, often underpinning core operational activities where reliability, specificity and domain knowledge matter. In our view, this type of functionality is structurally more difficult to disrupt, even as AI capabilities continue to evolve. Where these businesses also benefit from specialist sponsor ownership, the resilience is further reinforced through disciplined product development and operational support.

A commonly used lens for assessing software business quality is the Rule of 40. It’s a rule of thumb that measures whether a business’s annual revenue growth rate and its EBITDA margin, expressed as percentages and added together, exceed 40. It provides a simple measure of whether a company can balance growth with profitability – two characteristics that, when combined, tend to signal durable market positioning and a more sustainable long‑term operating profile. Businesses that consistently sit above this threshold often demonstrate strong customer value, efficient cost structures and an ability to invest through different cycles.

All companies within our software portfolio currently sit above the 40% benchmark. This is intentional. We prioritise businesses with diversified value propositions, meaningful customer embeddedness and the ability to sustain high margins alongside ongoing growth. We believe these attributes matter more, not less, in an environment where new technologies can alter competitive dynamics.

While industry commentary around GenAI continues to evolve, our approach remains rooted in fundamentals. Our focus is on software that sits at the heart of customer operations, with business models displaying clear relevance and the operational resilience required to manage both periods of change and across cycles. In practice, that means staying disciplined and backing businesses built to endure and generate stable cashflows rather than those chasing short-term momentum or reward.