One of Europe’s biggest backers of private software companies has written down the value of two thirds of its largest holdings in the first quarter of the year, heightening fears that artificial intelligence could seriously damage the sector.

Hg Capital Trust, the publicly traded vehicle for Hg, the private equity firm that manages $110 billion of funds, reported that its net asset value fell by 5.4 per cent in the quarter, driven by a 9 per cent decline in the valuation of its portfolio. The manager cited the “indiscriminate” sell-off in the software sector. 

Investors have exited their investments in software companies this year after a wave of AI product launches that raised questions about the future of the industry, a phenomenon known as the “SaaSpocalypse” as in “software as a service”.

The fear is that AI tools, such as Anthropic’s Claude Code, could threaten the software-as-a-service subscription model, which provides many companies in the sector with a reliable revenue stream. In the long-run, some even argue that AI’s increasing capabilities will enable customers to perform some tasks in-house, rather than rely on external providers. 

Publicly traded software companies have had nearly $2 trillion wiped off the value of their shares, according to a recent report from Morgan Stanley, the US investment bank. However, it is much more difficult to provide equivalent estimates for private companies, making updates from companies such as Hg Capital particularly informative for investors. 

Hg Capital marked down 14 of its 20 largest holdings in the quarter. The fund’s investment in IFS, a Swedish company specialising in AI for manufacturing, was written down by 7 per cent, while its stake in Howden, the London-based insurance company, lost 9 per cent. 

The trust’s investment in Visma Software, a company that was forced to delay its eagerly anticipated London listing due to the sell-off, was trimmed by 1 per cent. 

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Private equity firms have targeted software companies because of their subscription-based models, which generate predictable recurring revenue, and their high operating margins. Morgan Stanley estimated that software and IT services account for about 30 per cent of the assets under management of US business development companies, which are a variety of private credit fund, leaving them particularly exposed if the valuation of software companies fails to rebound. 

Commenting on Hg Capital’s update, analysts at Jefferies said: “The key question is what degree of further de-rating could follow over subsequent quarters given the remainder of the valuation is driven by private market data points that will take longer to feed through.”

Shares in Hg Capital have lost 27 per cent this year and yesterday shed a further 3½p, or 0.9 per cent, to close at 370½p, valuing the business at £1.7 billion. Despite the relatively weak performance, the company insisted that its portfolio was well placed to benefit from the rise of AI. 

Jim Strang, chairman of the company, said: “The broad-based sell-off in the software sector, substantively driven by fears over the disruptive threat of AI to existing businesses, has been largely indiscriminate, with little distinction between the many different types of businesses that are found across the software sector.”

Strang argued that companies in Hg’s portfolio would help meet the need to provide outputs for customers which were “100 per cent accurate”, based on their “deep [and] embedded” relationship with customers as well as their proprietary datasets. 

“While all technology assets will be impacted by the adoption of AI, the Hg portfolio companies are well placed to see their specific value propositions enhanced by AI integration rather than to be replaced altogether,” he said. 

The company noted that in March it had exited Geomatikk, a technology and services company, at a small uplift to its December value while completing the sale of its stake in Intelerad, a medical imaging company, which had been announced in November, for more than 60 per cent of book value.

Strang said that these exits demonstrated “the success Hg has had in developing a portfolio which is positioned to be a net beneficiary of the AI transformation across the software industry”.