Software Investing Demands Organic Growth Over Financial Engineering, Says Seasoned Investor

In Brief:

Private equity firms must fundamentally shift from financial engineering to backing businesses with genuine organic growth as higher interest rates eliminate traditional return drivers like leverage and multiple arbitrage. Nic Humphries, Senior Partner and Executive Chairman of Hg, demonstrates how three decades of focused software investing has built Europe's second-largest technology conglomerate by prioritizing customer value over financial manipulation. Speaking from Hg's London offices with Moonfare CEO Steffen Pauls, Humphries explains how his firm manages over $75 billion across 50+ companies employing 120,000 people worldwide, with their portfolio generating consistent high-teens revenue growth and 20%+ EBITDA expansion even through market downturns. His journey from near-failure in the 1990s to building a specialized software investor illustrates how discipline and focus can create sustainable competitive advantages in an increasingly challenging investment environment.

Big Picture Drivers:

• Growth Imperative: Higher inflation and interest rates demand focus on businesses with inherent growth rather than financial engineering or leverage strategies

• Platform Technology Shifts: AI represents the next 15-20 year transformation cycle following cloud computing's decade-long disruption of legacy software

• European Market Structure: Fragmented regulatory environments create barriers that benefit established specialists with deep local expertise and relationships

• Long-term Value Creation: Serial compounders require both market-leading products and infinite runway for reinvesting excess capital at attractive returns

Key Topics Covered:

• Specialization Strategy: How Hg evolved from six-sector generalist to pure-play software specialist between 2001-2008 to achieve better returns with lower volatility

• AI Integration: Managing portfolio companies through the transition from cloud/SaaS to AI-enabled software across customer support, R&D, and product development

• Portfolio Management: The realization committee process that delivers top-decile DPI by selling weaker investments early while holding compounders longer

• European Opportunity: Why Europe's fragmented markets and high percentage of private software companies create compelling investment opportunities

Key Insights:

• Growth Imperative: In higher interest rate environments, private equity firms can no longer rely on buying at the right price, adding leverage, and cutting costs—they must back businesses with genuine organic revenue growth from products customers actually want.

• Specialization Advantage: Focusing on eight specific software sub-sectors for 15-20 years enables better due diligence and value creation than generalist approaches, with 120 investment executives and 70 operators dedicated solely to B2B workflow software.

• Exit Discipline: Implementing a realization committee process reverses the typical private equity pattern of early good exits followed by poor late-stage investments, delivering 1x cash DPI in five years versus industry average of eight years.

• AI Transformation: The next platform shift will be as pervasive as cloud computing but with massive productivity benefits for R&D, customer support, and market expansion opportunities that both incumbents and startups will pursue.

• European Structure: Less than 50% of Europe's top software companies are publicly listed compared to 80% in the US, creating significant opportunities for private equity specialists to access quality assets.

• Compounder Identification: The best long-term investments combine market-leading products in their home markets with an almost infinite runway for deploying excess capital at attractive incremental returns across multiple geographies.

Memorable Quotes:

• "I blew up two of my first four investments completely and that calls me in '93 to go home and tell my wife I may be fired anytime soon" - Nic Humphries, explaining how early failures forced him to develop a specialization strategy

• "You can no longer make returns from buying at the right price, leverage, cutting costs if you don't fundamentally have a business that is growing topline revenues" - Nic Humphries, describing the new reality for private equity in higher rate environments

• "Most private equity firms just allow the individual deal partners to decide what to do on exits, and what you end up with is cutting the flowers and watering the weeds" - Nic Humphries, explaining why most firms have poor DPI performance

• "Pick a growth sector, pick a sector that is going to be growing for the next 10, 20, 30 years where the winds are at your back and not in your face" - Nic Humphries, offering career advice based on his mining town upbringing

• "Nobody quite knows exactly where AI will lead, but it's going to be pervasive in just about every aspect of our personal, consumer and business lives" - Nic Humphries, discussing the unpredictability but certainty of AI's broad impact

The Wrap:

Humphries' three-decade journey from near-failure to building Europe's largest software investor illustrates how specialization and discipline can create sustainable competitive advantages in private equity. His emphasis on organic growth over financial engineering and systematic exit processes over individual judgment reflects hard-won lessons that may prove essential as the industry adapts to permanently higher cost of capital. The conversation reveals how successful firms are positioning for the AI transformation while avoiding the macro-economic and geopolitical risks that have derailed many investment strategies in recent years.