Skip to mainSkip to footer

Software-As-A-Compounder

[Management Team] [Author] Ejikeme Obe
Author(s)
Obe EJIKEME
Published on
11 March 2025

Technology remains a core, long term holding with Carmignac’s Global Equity Compounders strategy and fund manager Obe Ejikeme explains why we favour Software within this fast moving global sector.

Historically, technological revolutions have followed a predictable pattern: they begin with breakthroughs in infrastructure, particularly hardware, before progressing to software applications. In her seminal work, Technological Revolutions and Financial Capital, Carlota Perez argues that each technological revolution initiates a paradigm shift, creating a "new economy" driven by clusters of innovation. These clusters generate unprecedented opportunities but are often accompanied by speculative bubbles before stabilizing into long-term growth. In the early 1980s, IBM and Apple pioneered the personal computing revolution with groundbreaking hardware leading IBM to become the largest company in the world in 1986. When the software company Microsoft went public, with a market capitalization equal to just 1% of IBM's at the time. There's no need to remind you who emerged as the long-term winner...

Today, we are seeing such an innovation cycle transition unfold in the artificial intelligence (AI) space. Close to a trillion dollars has been invested so far in AI infrastructure and new players like Deepseek and Mistral AI, along with ongoing advancements in efficiency, are significantly reducing the costs of AI inference. Investors are now looking for use cases that might generate a return on investment. Software companies — such as those held in the portfolio of FP Carmignac Global Equity Compounders — that control data and workflows seem very well placed to bring AI into real-world business applications.

Software business model: the ultimate compounding machine

A. RECURRING REVENUE ENGINE: FOUNDATION OF COMPOUNDING

At the heart of software's compounding power lies the transition from perpetual licenses to subscription-based recurring models. This shift to SaaS (Software-as-a-Service) subscriptions has fundamentally transformed the economic DNA of those companies. Unlike traditional license models that required continuous sales efforts to secure one-time payments as licenses expire, SaaS platforms generate annuity-like cash flows through automatic renewals and usage-based pricing. When customers transition from one-time purchases to ongoing subscriptions, they effectively prepay future product value while giving vendors continuous visibility into revenue streams.

The financial mechanics are stark: if a SaaS company retains 90% of its customers and grows new bookings by 30% annually, it can triple its revenue within five years. This contrasts sharply with industrial sectors, where similar growth would necessitate massive CAPEX expenditures. FP Carmignac Global Equity Compounders’ portfolio holding Adobe exemplifies this principle— their transition from selling Creative Suite licenses to Adobe Creative Cloud has been very successful. From 2004 to 2014, under a license-based model, Adobe's revenue growth was approximately 9.5% annualized. After introducing Creative Cloud, revenue growth nearly doubled, reaching 18% annualized over the next decade. During this period, Adobe Creative Cloud came to account for more than 90% of their revenue1. This transition demonstrates the power of the SaaS model in driving sustained growth and increasing customer lifetime value.

B. ZERO MARGINAL COST SCALABILITY

Software's unique cost structure—high fixed research and development (R&D) costs but near-zero marginal distribution costs—creates operating leverage unmatched in other industries. Once R&D costs are sunk, each incremental software dollar flows disproportionately to the bottom line. For investors, this translates to durable compounding, insulated from inflationary and cyclical pressures plaguing asset-heavy sectors.

When an enterprise software provider like SAP decides to transition to a cloud-first approach, the restructuring can involve billions of dollars and affect thousands of employees. However, as this major transformation project reaches critical mass, each additional customer served will further improve margins. Today, SAP’s success of transitioning to a cloud-based software solution is evident with cloud software growth exceeding 25% and operating profit has risen by 28%2. This increase in profit is due to investments in cloud products made several years ago, demonstrating the compounding benefits of scale. As the tech landscape continues to evolve, particularly with the emergence of AI, it will be intriguing to see if similar patterns of transformation and growth unfold.

C. REINVESTMENT FLYWHEELS IN PLATFORM ECOSYSTEMS

Leading software companies deploy retained earnings into adjacent markets, creating concentric growth rings (like tree rings) and therefore margin expansions through reinvestment cycles. That’s why we are focusing on companies that reinvest significantly. Microsoft's $19 billion annual R&D budget funds initiatives from AI copilots in Office 365 to quantum computing — each innovation reinforcing the ecosystem lock-in. This "reinvestment cascade" transforms software platforms into durable compounding engines as illustrated by Microsoft, the ultimate software compounder:

The use of trademarks and logos does not imply any affiliation or endorsement. It is not intended to promote direct investment in these instruments and does not constitute investment advice. Source: Carmignac, Bloomberg, Microsoft website as of 28/02/2025.

The disruptive impacts of AI

Before ChatGPT and more broadly GenAI emerged, SaaS was among the fastest-growing business models. During the 2010s, SaaS businesses experienced explosive revenue growth, surging by over 300% – a rate five times faster than S&P 500 revenues in the same period. This remarkable trajectory has set the stage for a pivotal debate: will AI disrupt software business models, or will it usher in an era of unprecedented innovation and growth for them?

As SAP CEO Christian Klein notes following the recent Deepseek news: "You see the progress also with regard to the performance of these large language models or the chips. So it becomes cheaper. And this is where we are benefiting from, because we are sitting at the top, infusing AI, creating high-value use cases for businesses3". And this is one of our convictions, that AI-driven productivity gains will benefit software companies. All the more so as these companies are already using these advances. ServiceNow’s foray into AI, for example, began in 2017 with the introduction of Predictive Intelligence, a tool designed to enhance IT service management. By analyzing historical incident data, the platform automated categorization and routing, achieving precision rates exceeding 99% for hardware-related issues. This capability reduced manual intervention and enabled faster resolution times, setting a precedent for AI’s role in workflow optimization.

One of the most promising AI use case is what we called Agentic AI. Unlike generative AI, which focuses on content, Agentic AI emphasizes autonomous decision-making and action, enabling systems to adapt, reason, and execute tasks independently without human supervision. This paradigm shift is poised to revolutionize industries by automating complex workflows, optimizing business processes, and driving scalability. We believe that software will benefit from this trend due to the real-time data access and recording required for AI agents, as well as the potential efficiency and profitability gains for software companies utilizing agents. AI innovation is expected to usher in a new wave of automation, projected to generate $500 bn annually in incremental revenue for the enterprise software industry by 20354.

Software: we can’t do without it

As enterprises plan to allocate more than 50% of 2025 IT budgets to cloud/SaaS today (vs. 10% in 20155), software vendors have become a bit like the cash machine of the digital economy - aggregating recurring cash flows and compounding shareholder value through platform effects. They offer the rare combination of visibility (90%+ recurring revenue), durability (high client retention rates), and optionality (AI monetization) required for exponential compounding. These are attractive stock characteristics for an active manager seeking long term Quality investment opportunities and explains why these businesses are the cornerstone of our tech exposure in the Global Equity Compounders strategy. Technology names continue to be the largest exposure in the portfolio at 29%.

The Fund deliberately includes a diverse range of software solutions, such as engineering software (Ansys, Cadence Design, Autodesk), cloud computing platforms (Microsoft, ServiceNow), enterprise resource planning software (SAP, Oracle), and specialized software for specific needs, including cybersecurity (Palo Alto Networks) and financial management (Intuit). We are confident that these software companies will continue to sustain and expand their revenue growth as these are supported by structural trends, with independent forecasts indicating that earnings should compound at approx 13.7% CAGR through 20306.

Download the document

1Adobe company data, Source: Bloomberg as of 20/02/2025.

2SAP financial results Q4 and FY 2024, Source: SAP.com

3Investor’s business daily, 28/01/2025: https://www.investors.com/news/technology/deepseek-ai-enterprise-software-sap-nvidia/

4Redburn Atlantic, Enterprise software call my agent, 19/02/2025.

5Gartner research, as of 9/02/2025.

6Grand View Research, Software as a Service Market Size, Industry Report, 2030.

Source: Carmignac, Bloomberg, as of 28/02/2025.

FP Carmignac Global Equity Compounders

A global, high-conviction equity fund for long-term investors
Discover the fund page

FP Carmignac Global Equity Compounders A GBP ACC

ISIN: GB00BMGLBK75
Recommended minimum investment horizon
5 years
Risk indicator*
5/7
SFDR - Fund Classification
Article -

*Risk Scale from the KIID (Key Investor Information Document). Risk 1 does not mean a risk-free investment. This indicator may change over time.

Main risks of the fund

Equity: The Fund may be affected by stock price variations, the scale of which is dependent on external factors, stock trading volumes or market capitalization.
Liquidity: Temporary market distortions may have an impact on the pricing conditions under which the Fund might be caused to liquidate, initiate or modify its positions.
Discretionary Management: Anticipations of financial market changes made by the Management Company have a direct effect on the Fund's performance, which depends on the stocks selected.
The Fund presents a risk of loss of capital. Please refer to the Fund’s prospectus to view the exhaustive list of risks.

Fees

ISIN: GB00BMGLBK75
Maximum subscription fees paid to distributors
-
Redemption Fees
-
Conversion Fee
-
Ongoing Charges
0.75%
Management Fees
0.67% MAX
Performance Fees
-

Footnote

Performance

ISIN: GB00BMGLBK75
FP Carmignac Global Equity Compounders+4.2+1.1+17.6+21.0−19.0+22.6+23.0
Reference Indicator+11.3+12.8+20.8+16.8−7.8+22.9+19.8
FP Carmignac Global Equity Compounders+10.6%+4.8%+9.8%
Reference Indicator+18.3%+11.0%+14.5%

Source: Carmignac at 30 Oct 2026.
Date of 1st NAV : 15/05/2020.
Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor). The Fund presents a risk of loss of capital.
The return may increase or decrease as a result of currency fluctuations, for the shares which are not currency-hedged.

Reference Indicator: MSCI World NR index

Share

Marketing communication. Please refer to the KID/KIID, prospectus of the fund before making any final investment decisions. This document is intended for professional clients.

This material may not be reproduced, in whole or in part, without prior authorisation from the Management Company. This material does not constitute a subscription offer, nor does it constitute investment advice. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. This material has been provided to you for informational purposes only and may not be relied upon by you in evaluating the merits of investing in any securities or interests referred to herein or for any other purposes. The information contained in this material may be partial information and may be modified without prior notice. They are expressed as of the date of writing and are derived from proprietary and non-proprietary sources deemed by Carmignac to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Carmignac, its officers, employees or agents.

Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor). The return may increase or decrease as a result of currency fluctuations, for the shares which are not currency-hedged.

Reference to certain securities and financial instruments is for illustrative purposes to highlight stocks that are or have been included in the portfolios of funds in the Carmignac range. This is not intended to promote direct investment in those instruments, nor does it constitute investment advice. The Management Company is not subject to prohibition on trading in these instruments prior to issuing any communication. The portfolios of Carmignac funds may change without previous notice. The reference to a ranking or prize, is no guarantee of the future results of the UCIS or the manager.

Morningstar Rating™ : © Morningstar, Inc. All Rights Reserved. The information contained herein: is proprietary to Morningstar and/or its content providers; may not be copied or distributed; and is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Access to the Funds may be subject to restrictions regarding certain persons or countries. This material is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the material or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not access this material. Taxation depends on the situation of the individual. The Funds are not registered for retail distribution in Asia, in Japan, in North America, nor are they registered in South America. Carmignac Funds are registered in Singapore as restricted foreign scheme (for professional clients only). The Funds have not been registered under the US Securities Act of 1933. The Funds may not be offered or sold, directly or indirectly, for the benefit or on behalf of a «U.S. person», according to the definition of the US Regulation S and FATCA.
The risks, fees and ongoing charges are described in the KID (Key Information Document). The KID must be made available to the subscriber prior to subscription. The subscriber must read the KID. Investors may lose some or all their capital, as the capital in the funds are not guaranteed. The Funds present a risk of loss of capital.

The Funds’ prospectus, KIDs, NAVs and annual reports are available at www.carmignac.com/en, or upon request to the Management Carmignac Portfolio refers to the sub-funds of Carmignac Portfolio SICAV, an investment company under Luxembourg law, conforming to the UCITS Directive. The French investment funds (fonds communs de placement or FCP) are common funds in contractual form conforming to the UCITS or AIFM Directive under French law.

  • In the United Kingdom: the Funds’ respective prospectuses, KIIDs and annual reports are available at www.carmignac.com/en-gb, or upon request to the Management Company, or for the French Funds, at the offices of the acilities Agent, Carmignac UK Ltd, 2 Carlton House Terrace, London, SW1Y 5AF. This document was prepared by Carmignac Gestion, Carmignac Gestion Luxembourg or Carmignac UK Ltd. FP Carmignac ICVC (the “Company”) is an Investment Company with variable capital incorporated in England and Wales under registered number 839620 and is authorised by the FCA with effect from 4 April 2019 and launched on 15 May 2019. FundRock Partners Limited is the Authorised Corporate Director (the “ACD”) of the Company and is authorised and regulated by the FCA. Registered Office: Hamilton Centre, Rodney Way, Chelmsford, Essex, CM1 3BY, UK; Registered in England and Wales with number 4162989. Carmignac Gestion Luxembourg SA has been appointed as the Investment Manager and distributor in respect of the Company. Carmignac UK Ltd (Registered in England and Wales with number 14162894) has been appointed as a sub-Investment Manager of the Company and is authorised and regulated by the Financial Conduct Authority with FRN:984288.

  • In Switzerland: the prospectus, KIDs and annual report are available at www.carmignac.com/en-ch, or through our representative in Switzerland, CACEIS (Switzerland), S.A., Route de Signy 35, CH-1260 Nyon. The paying agent is CACEIS Bank, Montrouge, Nyon Branch / Switzerland, Route de Signy 35, 1260 Nyon.

  • In Belgium: This document is intended for professional clients. This content has not been validated by FSMA. The decision to invest in the promoted fund should take into account all its characteristics or objectives as described in its prospectus. This communication is published by Carmignac Gestion S.A., a portfolio management company approved by the Autorité des Marchés Financiers (AMF) in France, and its Luxembourg subsidiary Carmignac Gestion Luxembourg, S.A., an investment fund management company approved by the Commission de Surveillance du Secteur Financier (CSSF). “Carmignac” is a registered trademark. “Investing in your Interest” is a slogan associated with the Carmignac trademark. This document does not constitute advice on any investment or arbitrage of transferable securities or any other asset management or investment product or service. The information and opinions contained in this document do not take into account investors’ specific individual circumstances and must never be interpreted as legal, tax or investment advice. The information contained in this document may be partial and could be changed without notice. This document may not be reproduced in whole or in part without prior authorisation. The risks and fees are described in the KID (Key Information Document). The prospectus, KID, the net asset-values and the latest (semi-) annual management report may be obtained, free of charge, in French or in Dutch, from the management company (tel. +352 46 70 60 1) or by consulting its website or www.fundinfo.com. These materials may also be obtained from Caceis Belgium S.A., the financial service provider in Belgium, at the following address: avenue du port, 86c b320, B-1000 Brussels. The Fund (fonds commun de placement or FCP) is a common fund in contractual form conforming to the UCITS Directive under French law. Access to the Fund may be subject to restrictions regarding certain persons or countries. The Funds are not registered for retail distribution in Asia, in Japan, in North America, nor are they registered in South America. Carmignac Funds are registered in Singapore as restricted foreign scheme (for professional clients only). The Funds have not been registered under the US Securities Act of 1933. The Funds may not be offered or sold, directly or indirectly, for the benefit or on behalf of a «U.S. person», according to the definition of the US Regulation S and FATCA. In case of subscription to a fund subject to Article 19bis of the Belgian Income Tax Code (CIR92), the investor will have to pay, upon redemption of his or her shares, a withholding tax of 30% on the income (in the form of interest, or capital gains or losses) derived from the return on assets invested in debt claims. Distributions are subject to withholding tax of 30% without income distinction. In case of subscription in a French investment fund (fonds commun de placement or FCP), you must declare on tax form, each year, the share of the dividends (and interest, if applicable) received by the Fund. Any complaint may be referred to complaints@carmignac.com or CARMIGNAC GESTION - Compliance and Internal Controls - 24 place Vendôme Paris France or on the website www.ombudsfin.be.

The Management Company can cease promotion in your country anytime. Investors have access to a summary of their rights at section 5 entitled "summary of investor rights" on the following links: UK ; Switzerland ; France ; Luxembourg ; Sweden. Belgium (French) ; Belgium (Dutch)

For Carmignac Portfolio Long-Short European Equities: Carmignac Gestion Luxembourg SA in its capacity as the Management Company for Carmignac Portfolio, has delegated the investment management of this Sub-Fund to White Creek Capital LLP (Registered in England and Wales with number OCC447169) from 2nd May 2024. White Creek Capital LLP is authorised and regulated by the Financial Conduct Authority with FRN : 998349.

Carmignac Private Evergreen refers to the Private Evergreen sub-fund of the SICAV Carmignac S.A. SICAV – PART II UCI, registered with the Luxembourg RCS under number B285278.