Enterprise Software Investing at an AI Inflection Point

In Brief:

The enterprise software market is experiencing a once-in-20-year platform shift with AI that could fundamentally change how businesses operate, creating both massive opportunities and disruption risks for existing players. Nic Humphries, Senior Partner and Executive Chairman of HG Capital, one of the world's top 10 largest private equity firms with over $100 billion in assets under management, warns that companies must aggressively adopt AI technologies or face being disrupted by startups. Speaking with host Michael Sidgmore on the Alt Goes Mainstream podcast from HG's London office, Humphries draws on 25 years of experience building a portfolio of 55 mission-critical enterprise software companies worth over $180 billion in collective enterprise value. His firm has delivered above 30% gross returns with less than 1% capital loss over two decades by focusing exclusively on B2B back-office software that businesses can't operate without - like accounting, payroll, and compliance systems.

Big Picture Drivers:

• Platform Shift: AI represents the first major computing paradigm change in 15-20 years, following mainframe to PC and PC to web transitions

• Market Fragmentation: European software markets offer 27 countries with regulation-specific opportunities versus one large U.S. market

• Private Market Growth: 87% of U.S. companies with $100M+ revenue are private, creating vast untapped investment opportunities

• Technological Acceleration: Software development costs are decreasing for the first time in history due to AI capabilities

  
  

Key Insights:

• Mission-Critical Moats: Companies that own core business systems like accounting or payroll can successfully sell 10-15 additional modules with 50% attachment rates because customers prefer single-vendor solutions for critical operations.

• Geographic Specialization: No payroll software company in history has successfully moved the same product across countries due to regulatory differences, making local market leaders highly defensible against global competitors.

• AI Disruption Timeline: While AI will create major changes, platform shifts typically take 15-20 years to fully pervade business and social life, giving incumbents time to adapt if they act aggressively now.

• Returns Discipline: HG's strategy focuses on 91-92% of investments returning 2-4x money rather than seeking 20x+ home runs, achieving this through 92-93% recurring revenue businesses that grow every month for decades.

• Edge Case Advantage: Startups can build 90-95% of accounting software quickly with AI, but the final 10-15% involving complex regulatory edge cases (like UK charity accounting) requires deep domain expertise that incumbents possess.

• Realization Strategy: Returning 1x fund capital within five years prevents IRR degradation, requiring firms to exit "good but not great" investments early while holding the top 20% for longer periods.

Memorable Quotes:

• "For the first time in human history, the cost of developing software is getting cheaper, not more expensive. That's never been true at any point until about a year ago." - Nic Humphries, explaining AI's unprecedented impact on software development economics

• "If you're not using Claude Anthropic and OpenAI right now and spending an hour a day yourself, whoever you are in business, whether you're a chief executive or a developer, you're behind." - Nic Humphries, on the urgency of AI adoption for all business professionals

• "I could be the Lionel Messi of mining and I wouldn't have a job because there is no mining left in the UK. You can be a very average software investor for the last 25 years and you do okay." - Nic Humphries, on the importance of choosing growth industries over declining ones

• "We've literally never had a down month at all in the last 15 years. There's never been a single month, not in COVID, not in the GFC where they had a down month ever on revenue or profitability." - Nic Humphries, describing the resilience of HG's mission-critical software portfolio

• "Don't stick your head in the sand. Believe that this is going to be a very major change. You have to adopt these technologies as fast as you possibly can initially internally within your business." - Nic Humphries, advising incumbent software companies on AI strategy

The Wrap:

Humphries' perspective reveals how private equity firms with deep sector expertise are positioning for the AI revolution by backing established software companies that can leverage their customer relationships and regulatory knowledge while rapidly adopting new technologies. His firm's 25-year track record of consistent returns through multiple market cycles demonstrates that disciplined focus on mission-critical software can generate venture capital-level returns with much lower volatility, particularly as AI enhances rather than replaces these essential business systems.