Investec View: We have previously (see here) referred to being in a seminal moment for Artificial Intelligence (AI). The disruptive potential of the technology is undeniable; it is difficult to imagine a more significant investment opportunity and risk over the next decade, and we are now beginning to see the consequences materialise. Over recent months, there has been a step change in the enterprise functionality of AI, and earlier this week Anthropic announced new automation capabilities for Claude. This has prompted a sharp sell-off in Software-as-a-Service (“SaaS”) stocks, amid fears that AI could disintermediate applications and disrupt the seat-based, recurring revenue models that have historically underpinned premium valuation multiples. HgCapital (“HGT”) has been particularly impacted, with its shares down 25% over recent days. Where do we go from here? This is clearly a highly complex and fast-moving situation, and recent developments serve as a stark reminder that there will be several more bouts of volatility ahead. While AI may, over the longer-term, reshape SaaS pricing models and moderate valuation multiples, we find it difficult to envisage a scenario in which this disruption is both as ubiquitous and instantaneous for HGT’s portfolio as its recent share price movements imply. The portfolio features vertically integrated SaaS businesses that are “mission critical” with proprietary data and complex or highly regulated use cases. We strongly believe that companies cannot rely on a probabilistic model that is correct most of the time, nor will they want to be responsible for ongoing maintenance, in back office areas such as payroll or HR. This should provide incumbents with more time to establish an advantage, provided they are able to evolve alongside a shift, as Hg describes, from systems of record to systems of action. We highlight Hg’s significant investment to support portfolio companies with this transition, most notably with the launch of Hg Catalyst last November, which serves as an AI incubator comprising over 80 dedicated AI engineers, product managers and designers. While there are risks in simply looking “across the valley”, given elevated valuations (25.5x EV/EBITDA as at 30 September NAV) and significant portfolio company leverage (7.3x net debt/EBITDA), our initial impression is that the 31% share price discount to the 30 September NAV provides a substantial margin of safety, and we upgrade our recommendation to a Buy on a tactical basis. In the meantime, we await the imminent publication of the preliminary results, including the 31 December NAV, which will provide further colour on the underlying portfolio companies’ operational performance and on the Board’s intensions regarding share buybacks.