A Hard Look at Software

February 2026

What AI Can—and Can’t—Easily Disrupt

The Role of AI

There has been a surge in media coverage suggesting artificial intelligence will “displace” traditional SaaS software companies by enabling non-technical users to build software.  What is often overlooked in this narrative is that copying the surface is not the same as replacing the system. Market attention has largely centered on what’s easiest to replicate such as interfaces, workflows, and surface-level features while largely ignoring the harder, more durable layer: the embedded systems and relationship maps that manage access, collaboration, security, and visibility. As AI drives an explosion in code and autonomous agents, we believe these systems are less likely to be displaced and may, in fact, grow more valuable. 

Our Portfolio as of December 31, 2025

Deerpath’s portfolio reflects this view. We have a 3% allocation to software. Meanwhile, our remaining technology exposure is concentrated in adjacent services such as IT consulting, implementation, procurement, and managed services. These businesses require specialized, context-driven problem solving that AI alone is unlikely to deliver. They depend on human and physical execution, and the time and capital required to commercialize AI offerings relative to the total addressable market creates structural challenges for disruption.

Our companies in these sub-segments align with the core Deerpath borrower profile: long-duration demand, proven operating histories, and conservative capital structures, with average net senior leverage of 4.5x and loan-to-value of approximately 50%. 

As for our direct software exposure, we remain comfortable with our positions, which carry  average  net senior leverage of 4.5-5x and nearterm debt maturities. Performance of these loans has been stable, and the companies  operate  in niche markets with focused offerings rather than competing with large-scale platform software providers. 

The remaining 83% of the Deerpath portfolio is centered on essential, nondiscretionary products and services, including architecture and engineering, auto repair, healthcare providers and equipment, HVAC installation and maintenance, and tax and accounting services. 

We will continue to  monitor  AI’s implications for software, maintaining a cautious view and close oversight of our current exposure.

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Our portfolio as of December 31, 2025.

Lower Middle Market Intelligence in the Age of AI

History suggests that the productivity benefits of major technology cycles, from railroads to electricity to the internet, ultimately spread broadly across the economy, but that process takes time and occurs unevenly. As a general rule, we aim to avoid companies in AI’s direct line of fire or for which AI is a core product tied to any single technological path, while selectively leaning into businesses that can benefit from AI as a tool. Compared with large multinationals on one end of the spectrum and early-stage startups on the other, lower middle market companies often have fewer legacy systems to untangle and sufficient operating scale to justify implementation. The potential gains are tangible: faster permitting and project timelines in construction services through AI-enabled workflow tools, or reduced overhead from AI-driven revenue-cycle management systems in specialty health care practices.

At the same time, our market is not immune to the risks of poor execution or overreach. We have encountered and declined opportunities involving businesses that viewed AI as a silver bullet, assuming it would draw them into new processes or customer segments outside their core competencies. At Deerpath, we review over 2,000 companies annually to arrive at roughly 25 new platform investments each year. As time goes on, we continue to find that the disciplines that have long served us well remain central to our approach: selectivity, structure, a focus on downside protection, and reinforcing a conservative posture when uncertainty is high. In an environment defined by rapid change and uneven adoption, those traits remain essential to how we invest and how we manage risk.

Disciplined Lending Drives Consistent Outcomes

Safety, structure, and selectivity define our investment philosophy

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Deerpath Capital Management, LP (“Deerpath”) is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes; the information should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. In addition, the information contained in this document (i) has not been prepared for marketing purposes and (ii) may not be relied upon by any current or prospective investor as marketing. In all cases, interested parties should conduct their own investigation and analysis of any information set forth herein and consult with their own advisors. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable, and are not indicative of the performance of any particular fund or investment. Past performance is not a guarantee of future results. The information is subject to change without notice, there is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. Any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Any forward-looking statements, including expectations regarding technology adoption, AI impact, or portfolio performance, involve risks and uncertainties that may cause actual outcomes to differ materially. The information contained herein may not be reproduced or redistributed in any format without the express written approval of Deerpath.