Bosa/Wu: Private equity is about to eat its own software portfolio

The landscape of enterprise software is on the brink of a significant transformation, driven by an unexpected alliance between artificial intelligence and private equity. Recent reports indicate that Anthropic is exploring a partnership with major firms like Blackstone to create a joint venture that mirrors the Palantir model, focusing on consulting services that would incorporate its AI model, Claude, into various portfolio companies. This strategic move comes at a critical time for Anthropic, which recently lost its distribution channel with the Pentagon. However, private equity firms face the challenge of potentially undermining their own software investments amidst a growing trend towards software-as-a-service (SaaS) disruption. For firms like Blackstone, the possibilities are enticing. With a diverse portfolio that includes sectors such as manufacturing, healthcare, and real estate, leveraging Claude to optimize operational costs could yield significant savings. Yet, the flip side is that many of the software licenses these companies might discontinue could belong to other private equity-owned firms, thus jeopardizing their revenue streams. Claude’s capabilities extend to various functionalities, like project management and customer relationship management. If a Blackstone-controlled manufacturer, for instance, opts for a custom tool utilizing Claude instead of renewing its existing software licenses, the firm saves costs while simultaneously affecting the revenue of the software provider. The implications for the software industry are profound. Private equity firms may be acting as catalysts for what some are calling the “SaaSpocalypse,” as they have the resources and motivation to swiftly implement changes across their portfolios. A partnership with a leading AI lab could enable these firms to dramatically reduce software expenditures, a shift that could occur much faster than traditional enterprise adoption cycles. In the past, private equity has been instrumental in promoting cloud software adoption among their portfolio companies. Now, the focus appears to be shifting towards AI as a service, potentially rendering certain software categories obsolete. The timeline for replacement could shrink from five years to just 18 months within a private equity framework, given their capacity to drive rapid change. Thoma Bravo, one of the largest software-focused asset managers, has publicly suggested that AI enhances the value of existing software products by adding intelligent features. However, if they do not actively integrate AI into their portfolio companies, they risk falling behind. Recent job cuts at companies like Atlassian and Block, aimed at reallocating resources towards AI initiatives, underline the market’s preference for companies that embrace AI, as evidenced by their rising stock prices. The challenge for firms like Thoma Bravo is to balance the deployment of AI to remain competitive while simultaneously facing the risk of diminished demand for the very software products they promote. If they fail to act, diversified firms could capitalize on AI advancements, potentially sidelining traditional software solutions altogether. The shift in strategy could pose existential threats to horizontal SaaS companies, especially those whose clients are part of diversified private equity portfolios that now have the motivation and means to innovate.