With multibillion dollar SaaS getting one shotted by Ai updates every 3 months, it’s easy to see why everyone is bearish now.
SaaS had a good run.
What will get red hot next? Maybe consumer products?
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Business services especially if they can leverage AI
Already happening. Agentic AI is already here in the services world. Services businesses are already getting killed in real-time, especially in the labour intensive and repeatble workstream world. Space is also extremely crowded with both traditional software and services team looking at these services as software names and paying insane multiples because of the opportunity for AI-led growth. It's one of the most obvious AI-plays and thus not sure how much more alpha you can squeeze now everyone is aware of it.
Yeah, AI agents are already old news. There may be some opportunity left for AI agents that don't have a human in the loop, but even that's a stretch.
Wouldn't services companies be able to automate more of their work and generate higher margins with AI? Or are you seeing their customers take things in house and / or put pricing pressure on their vendors?
I guess I'm just confused how AI is a no brainer headwind for services companies, when it seems like it could be a huge tailwind too.
...what's the moat?
There's none, that's why it's the most prone to agentic AI disruption. The only maybe moat is that there customers have high retention but it's not exactly mission critical probably even less than horizontal software and that space is (mostly rightfully) taking a beating.
“Services as software” feels very real to me in large part because we are seeing it already happen, AI agents can replace a lot of repeatable, labor-heavy workflows. Lots of AI companies already doing both workstreams to really high adoption rates. If that plays out; think we are going to see a similar level of multiple compression in the business services space as we have currently in SaaS. Think services is the most likely to be disrupted by AI. Since disruption opportunity, there is also naturally an opportunity to capture right-tail outside (as there is opportunity for you to be the one disrupted and have left-tail outcomes). Investing is all about risk-reward after all.
Services is cooked. Am on a team that hasn’t done a deal in 20+ months. More recently, nobody wants to touch white collar / professional services, and anything in blue collar services with a recurring element gets bid to the moon.
With the collapse of software, services has gotten incredibly competitive. Honestly not sure where we go from here but imagine we end up buying a facility services focused, project-based shitco.
Healthcare and industrials will probably continue to be pretty defensible sectors with good money but less of an investable universe given higher barriers to entry and policy factors.
Interested to hear the outlook of consumer and even more of digital media / internet, which has not gotten a lot of money in the past decade? Given that PE started as LBOs of consumer conglomerates, would be interesting if it reverts back to that, especially given the broadening of capital to retail investors who may be more interested in those assets
If it does rotate back to consumer I am selling so many positions lmao
Biotech
Utilities. Have you paid your bills lately?
True. A utility company such as PG&E is less likely to go bankrupt again due to enormous energy demand from data centers.
That's not really how it works...
This is how most PE thesis work though, about 15 seconds of thinking and then go find something to throw money at
In terms of products anything liquidity-related tbh. Securitizations/Private ABLs, Secondaries, sponsor-based private credit towards portcos, GP stakes. I think lower-LMM PC is also incredibly hot atm (from previous experience) due to a lot of banks having incredibly standardized conservative underwriting policies in the space and the bigger players chasing bigger deals due to all their overhead (so naturally this favors incredibly lean teams). It also leans heavily towards strategics with hard assets which personally I find as more sound. I don't think the fundamentals are there and I'm highly speculative, but sports finance is riding off incredible momentum as well and will likely continue to do well for the next few years. Defense tech and defense in general is pretty hot from my understanding due to the current geopolitical enviroment and a bunch of countries (notably Germany and Japan lol) doing multi-year remilitarization initiatives. This is a longer-term trend not reflective of just the last few years, but generally biopharma is pretty hot in the US. Depending on your thinking of AI, data centers and PU&I to support that infrastructure will continue to do well and regardless of whether or not its healthy for the economy, the government is going all in feels like. This is terrible for the economy long-term but good if you want short-term security that the industry will continue to advance. I personally think the inevitable pullback of AI and subsequent glut will absolutely wreck these 2 industries when it all falls but right now its pretty strong. I feel that Biopharma (relatively speaking) and Defensetech have solid fundamentals which could carry over the next few decades. Private liquidity solutions is my strongest conviction, and although I think it will inevitably have a pullback, it will become incredibly integral to PE firms as securitizations have become with banks, however the bid-ask will likely tighten, fees will compress and comp would proportionally go down in a few years when the market saturated and theres sufficient capital and talent. The rest seem like a cash grab before the hype dies and fundamentals kick in. This is my opinion.
How is telecom looking?
It’s in your title. The “Space Tech” sector in my opinion is the next hot thing.
How are you buying exposure?
$PL for earth imaging / data
$RKLB for launch + space systems
$VOYG for space infrastructure
PE firms created bubble in saas only to exit when its cheap for the first time to create a bubble in local services!
Services is in real trouble in an agentic AI world.
Software at least has a path to embed AI and try to defend value. A lot of PE-favorite services models are basically monetizing people-hours for repeatable knowledge work, exactly the type of thing AI will replace (and already is replacing). Let's take an example in the IT services world that a lot of major PE sponsors own an asset in: pricing is seat-based or tied to tickets / support volume. If AI automates more of the workflow, you need fewer humans, fewer seats, and less ongoing managed service. Utilization drops and customers push harder on price. On the other side, the space is also likely to be completely replaced by an agentic AI just providing the managed service. Looks really rough for the space even in the bull case (where AI doesn't fundamentally disrupt it).
Does everything go to zero? No. But underwriting SaaS-ish multiples and long-term margin durability there looks way tougher today. The question isn’t if AI hits these businesses anymore, it’s how fast. Services is probably the single worst place to be in as an investor right now, even worse than software.
services are so broad... business services like accounting or labor services like lawn mowing and HVAC
a16z confirmed they are looking for AI-native agencies.
My money is on Software and Surveillance as a Weapon (SaSaaW)
People keep saying services businesses (agreed) but can people give more examples of services businesses that are and will be disrupted?
Would have said services too but recent KPMG / Grant Thornton audit services pricing dispute that made it to FT front page gives me pause. Will the incumbent have pricing power or will efficiency gain just be ceded to the customers/token provider?
“Essential services” has already become the hot thing. Thanks a lot for shooting up the Roofing and HVAC multiples.
Anybody saying services or AI is operating from an outdated model.
New plasma technology and maritime businesses will drive the next wave of GDP post AI recoups on investment while that sector moves to maturity (which should happen within the next 3 years due to time compression of said investments)
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