September 11, 2026 – For years, software as a service (SaaS) stocks were prized for their attractive underlying business fundamentals, including recurring revenue, predictable growth, high gross margins, low capital intensity, and substantial operating leverage.
Over time, market participants grew increasingly positive on the sector, due to the following purportedly enduring characteristics:
- Recurring, subscription-based revenue: Instead of selling a software license once, SaaS companies collect monthly subscription payments, making future revenue reliable and predictable.
- High customer retention: After software becomes embedded in customer work flows, switching becomes painful, keeping churn low.
- Attractive gross margins: Once software is built, it generally earns above-market gross margins of 70-90%.
- Low capital intensity: Unlike other traditional businesses such as industrial or manufacturing companies (so called HALO businesses — Heavy Assets Low Obsolescence), SaaS companies do not require large amounts of initial or recurring capital investment. Investors prefer businesses that do not require continuous reinvestment.
- Scalability: Software can be sold globally little additional cost.
In the memo, we urged investors to be skeptical of the software bear market: “While severe negative sentiment dominates the securities of software companies, whether equity or credit, the most likely result is that mission-critical software companies will be fine, and may even thrive, in the age of artificial intelligence. In contrast, some software companies may see their revenue growth rates decline, or even turn negative, if they do not adapt and end up getting disrupted by AI. If one thing is certain, the market has taken a “baby out with the bath water” approach to the industry, with indiscriminate and relentless selling of the sector.”
Since then, most software stocks have rebounded, with cyber security names rallying particularly hard.
As software equity valuations have, on average, recovered their recent losses, SaaSpocalypse in the equity market may have been averted (for now). However, other segments of the capital markets that were painted with the “software exposure = bad” brush, such as private credit, have not been so lucky.
As software equities began to fall last September, listed private credit funds (BDCs) fell in tandem, given that software represents approximately 20% of all private credit loans. While SaaS equities bottomed in April and rallied over the subsequent six months, BDC NAV discounts widened from 0% last September to -20% today, with very little recovery. That said, a couple of other factors have pressured BDC prices over the past year, such as headline risk and base rate expectations, although both have recently turned from headwinds to tailwinds.
Source: Accelerate
Nevertheless, while credit investors still have lingering concerns regarding the SaaSpocalypse, equity investors seem to have determined that AI will not significantly threaten the favourable underlying fundamentals of software businesses. The market is still sorting out who is right.
Accelerate manages five alternative investment solutions, each with a specific mandate:
- Accelerate Arbitrage Fund (TSX: ARB): Merger Arbitrage
- Accelerate Absolute Return Fund (TSX: HDGE): Absolute Return
- Accelerate OneChoice Alternative Multi-Asset Fund (TSX: ONEC): Multi-Asset
- Accelerate Canadian Long Short Equity Fund (TSX: ATSX): Long Short Equity
- Accelerate Diversified Credit Income Fund (TSX: INCM): Private Credit
ARB gained 0.5% in August, compared with the benchmark S&P Merger Arbitrage Index’s 0.2% return.
The Fund remained active through the month, adding four new merger arbitrage investments (one Canadian, three American) while participating in eight SPAC IPOs (of the twelve total that came to market). In addition, the Fund successfully exited five merger arbitrage and three SPAC investments.
Currently, ARB is 153.5% long and -4.0% short (157.5% gross exposure), with 83% allocated to SPAC arbitrage and 17% to merger arbitrage (with 4% in LBOs and 13% in strategic M&A).
HDGE declined -4.2% in a challenging month for beta-neutral factor portfolios in general, and short selling in particular.
All major factor portfolios generated a negative return in August. While the top decile long portfolios were positive, all bottom decile (short) portfolios outperformed significantly — concentrated in the price momentum and trend factor portfolios. This dynamic of a painful factor unwind was detailed in our recent memo, The Quant Tremor. Heavily shorted stocks, such as the Goldman Sachs most shorted basket, rallied 8.7%, leading to a -7.6% return for the market neutral equity hedge fund proxy (GS Most Shorted basket – GS HF VIP basket).
Top Fund contributors include long positions in Centerra Gold and SanDisk, as well as a short position in Cogent Communications. Top Fund detractors include short positions in Rapid7, Sharplink, and Perpetua Resources.
ONEC gained 1.1% last month, primarily driven by a rebound in gold and private credit.
The yellow metal gained 13.3%, while private credit generated an 8.5% return. Other positive contributors include commodities, risk parity, managed futures, and leveraged loans, all of which generated returns of between 2% and 5% for the month. Both the long short equity and merger arbitrage allocations increased by less than 1%.
On the negative side of the performance ledger were the infrastructure, absolute return, and real estate allocations, which fell -3.3%, -4.2%, and -4.3%, respectively.
ATSX gained 0.9% in August compared to the benchmark S&P/TSX 60’s 2.3% return.
Canadian multi-factor long short portfolios faced difficult market conditions during the month (though not as bad as in the U.S.), with all long-short factor baskets generating negative alpha. That said, the Fund’s long bias, via its 150 long / 50 short structure, helped mitigate the underperformance.
Top Fund contributors include long positions in IAMGOLD, Wesdome Gold, and Centerra Gold. Top Fund detractors include short positions in Eldorado Gold, Alamos Gold, and Perpetua Resources.
INCM returned 7.0% (8.5% in CAD-hedged terms) in August, primarily due to NAV discounts tightening on the back of better than expected second quarter BDC results. The Fund’s average NAV discount tightened to -18.6% from -26.6% at the end of July as prices modestly recovered.
BDCs completed their Q2 reporting during the first half of the month, and we noted our thoughts on the results in our latest private credit report, Last Cycle’s Bill, Next Cycle’s Terms. In the memo, we discussed the favourable current setup for BDCs: “Higher base rates, wider spreads, greater upfront fees, lower leverage, tighter documentation, reduced origination competition — the forward economics of new lending turned favourable for the first time in years.” Moreover, the SaaSpocalypse scare and the deeply negative sentiment toward software lending appears behind us, and when combined with several fundamental factors inflecting positively (as noted above), make for a tailwind for a continued recovery in BDCs.
Currently, INCM is allocated to 20 private credit portfolios (through listed BDCs), totalling more than 5,000 loans and investments, of which 86.6% are senior secured and 92.6% are floating rate. The current yield on the INCM portfolio is 11.9%, and it trades at an 18.6% discount to its net asset value. INCM’s exposure to software loans is 16.4% of its portfolio.
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-Julian
Disclaimer: This distribution does not constitute investment, legal or tax advice. Data provided in this distribution should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. Please read the relevant prospectus before investing. For a summary of the risks of an investment in the Accelerate ETFs, please see the specific risks set out in the prospectus. ETFs are not guaranteed and the information in this distribution is based on current market conditions and may fluctuate and change in the future. Past performance is not indicative of future results. Decisions regarding tax, investments, and all other financial matters should be made solely with the guidance of a qualified professional. Visit www.AccelerateShares.com for more information.
