Claire Smith
Schroders says fears around artificial intelligence (AI) disrupting software businesses have been overblown, with private equity investors taking a far more selective and measured approach than public markets.
Claire Smith, head of investment directors, public and private markets at Schroders, said investors had adopted a “guilty until proven innocent” mentality toward software companies, despite many businesses remaining deeply embedded in their customers’ operations.
“We think the market has overreacted,” said Smith.
“There’s been a view that AI is killing software. AI is absolutely reshaping parts of the software market, but the idea that every software company is suddenly at risk simply isn’t how private investors are thinking about it.
“When you look underneath the surface, many of these businesses still have highly sticky customer bases, proprietary data and critical functionality.”
Smith said Schroders had conducted a detailed “AI threat assessment matrix” across its software investments to determine which businesses faced genuine disruption risk and which were likely to remain resilient.
“We assessed whether AI could reduce the number of software seats being sold, or potentially make a platform redundant altogether,” she said.
“In our semi-liquid private equity fund, only around 2 per cent of the portfolio fell into what we classified as high risk.”
Smith said software businesses servicing highly specialised industries, particularly those handling sensitive or operationally critical data, remained difficult to replace.
“You’re not going to vibe-code your way around payroll systems handling confidential patient data. Businesses still need reliability, compliance and security. AI is not eliminating that,” she said.
Private equity valuations had also been less volatile than listed markets because private investors were not caught up in the rapid repricing of large US technology stocks.
“At one point we were valuing our portfolio at a 40 per cent discount to listed markets,” Smith said.
“That discipline meant when listed markets sold off, we didn’t experience the same level of volatility.”
While AI disruption remains a risk for some companies, Smith said the technology was also creating significant investment opportunities.
“We have invested in AI-linked businesses including a data annotation company servicing major artificial intelligence groups including OpenAI, Meta and Nvidia. We prefer businesses that are benefiting from the growth in AI infrastructure, rather than trying to predict which individual AI applications will ultimately win,” said Smith.
Beyond technology, Smith said many of the strongest private equity opportunities continued to come from stable, cash-generative businesses operating in niche industries.
“Sometimes the best investments are the boring ones. We look for companies with recurring revenues, strong customer relationships and services that businesses simply cannot switch off during difficult economic periods,” she said.
Smith said a growing number of opportunities were also emerging from founder-led and family-owned businesses globally as ageing owners seek succession solutions.
“Private equity can provide the capital and expertise to help these businesses continue growing while preserving the legacy founders have built,” she added.
