Q1 2026 Investment Letter
- Daniel Fas
- May 11
- 9 min read
2026 has turned out to be a year of extreme unpredictability. AI disruption is developing at a rapid pace and the impacts on companies and markets have been extraordinary. Software stocks in particualr have gotten destroyed through Q1, which can be tracked via the iShares Software ETF (NYSE: IGV) - down 24%. Add in geopolitical conflicts from Venezuela to Iran, the impact on oil prices, which ultimately feed into inflation, and you have quite the quagmire.
Annual Performance
We are very tardy on reporting both our year-end 2025 performance and now our Q1 2026 results. We have had quite a busy start to the year by completely rebuilding our portfolio, which we'll talk about later. Without further ado let's dive into our results.
Seaside Private Capital (SPC) finished 2025 up 21.82% vs. 16.39% for the S&P 500 to close out 2025. We had a phenominal year, mainly due to a major portfolio overhaul in which we took advantage of a private market asset towards the end of last year. The fund is now heavily tilted in a direct private equity investment with the remaining fund focused on long duration and tax-advantaged public equity investments. This isn't a change in strategy. The fund continues to focus on companies with solid fundamentals that we believe can compound over the long-term.
Q1 Review and Market Outlook
2026 started out with a bang. The U.S. government snatched Venezuelan President Nocholas Maduro in the middle of the night, an operation that was completely unprecedented. Then just over a month later the U.S. and Isreal began a full-scale bombing campaign against Iran. Markets have been surprisingly resilient throughout all this geopolitical tension. Consumer spending remains strong and corporate earnings are showing no signs of weakness. If those two pillars continue to hold, the economy and the markets will continue to march forward.
Outside of geopolitical news, a couple story lines we are following include private credit, and the rapid development of AI. Issues have started to boil to the surface in the private credit space as default rates are rising, although they are still relatively low. Private credit loans are typically made by private equity sponsors (KKR, Blackstone, Apollo, etc.) via subsidiaries known as a business development companies ("BDC"). Most of these loans are made to support a private equity buyout. The primary issues stem from: 1) loans to software companies that are usually not cash flow positive, and 2) payment-in-kind (PIK) interest. Software has broadly been punished as AI has rapidly taken off and there has been a growing narrative that everyone can vibe-code their own software solutions. This has led to a harsh selloff in publicly traded software stocks, which in turn has led investors to question software company values in private market portfolios. Additionally, software companies that are privately held tend to be in varying growth stages in which they don't produce a lot of cash flow, and in fact may be burning cash. Therefore, these private loans rely on PIK interest, which is essentially an IOU form of payment. Instead of paying regular monthly interest, the interest is added to the loan balance to pay at a later date. The concern around AI and the impact on software companies has called into question whether these loans will ever be able to be paid back or not. That's the crux of the private credit issue.
I stole the chart below from the ClearBridge Investments Q1 2026 Letter, which puts the whole private credit market in perspective.
The private credit market is roughly $2 Trillion in size, but generally I don't think the issue will casue financial contagion. Software exposure varies from one firm to the next, but broadly speaking the exposure among the larger funds are somewhat limited and any distress should be manageable.
The AI story continues to move at a very rapid pace. It seems like the narrative changes almost daily. I'll just share a few high level thoughts on AI. I think the technology is absolutely transformative. AI tools can save time on trivial tasks like admin work and other minutia that generally interrupt your work productivity. When it comes to investing and monetizing those investments in AI, it's a little less clear on who the winners and losers will be. The current narritive is that software companies are doomed since vibe-coding, or the ability to create your own software system within minutes at a very low cost will replace legacy software. We personally don't buy into this for a variety of reasons and see generational investing opportunities arising. The second narrative, which has existed for some time now is to own the "picks and shovels" in the AI space such as Nvidia (NASDAQ: NVIDIA), Taiwan Semiconductors (NYSE: TSM), Oracle (NYSE: ORCL), Google (NASDAQ: GOOG), etc. In 2026 alone it is estimated that $700-$800 Billion in capex will be spent on AI infrastructure buildout by the major tech companies. Investors are starting to get weary on the level of spend and are starting to ask what the ROI on that spend is.
I do not presume to know all the answers, but I can formulate a strategy based off what I do know. The pick and shovel trade is a risky one that is very suseptible to swings in AI spend. I am also not excited to invest in companies that are required to invest billions of dollars into Ai infrastructure just to remain competetive. This is even more concerning given the circular deal-making between all the major AI companies. In one example, insiders at OpenAI have leaked that the company is missing internal revenue targets. Oracle is highly exposed to Open AI with 54% of thier future growth tied to OpenAI's Capex. If OpenAI stubmles, Oracle's stock will get obliterated. Making matters worse, Oracle has taken on $162 Billion in debt to support the AI infrastructure buildout. This can easily turn into a house of cards. See chart below.
I think the best playground at the moment is, ironically, in software companies. I have been doing a deep dive into software to understand what is actually happening and if the AI fears are overblown. I think they are. In fact, we believe AI and software are connected at the hip and CEO's such as NVidia's Jensen Huang have stated that publicly. If anything we believe that AI can be another revenue vertical for exisitng software companies.
Why software is here to stay:
Contextual Data & Proprietary Workflows: SaaS platforms already hold decades of structured, proprietary data and embedded business logic that AI models need to provide meaningful, domain-specific insights. In this context, platform companies like ServiceNow and Salesforce, which are systems of record, provide immense value in training AI models.
Trust and Reliability: Enterprises are hesitant to let raw LLMs directly handle critical functions. SaaS vendors offer compliance, data security, and product support. The main drawbacks with vibe-coding is who will maintain the system, who will take responsibility when something fails, who's going to fix issues when they arise at 2AM on a Saturday? When you buy an exisitng Saas product from an established company, you get the reliability which is absolutely mission critical for companies.
The Execution Layer: AI is good at reasoning, but SaaS platforms provide the deterministic execution layer—connecting AI to tools that actually complete tasks like invoicing, CRM updates, or HR workflows.
Distribution and Adoption: SaaS companies already have existing relationships with customers, making it easier to integrate AI tools into daily workflows rather than forcing users to adopt new, disparate AI platforms. Incumbents have already been implementing AI solutions with great speed and latest earnings data is showing strong growth potential.
We see massive opportunity in acquiring software companies at highly depressed prices. We're focusing on companies withclean balance sheets and have a history of strong cash flow generation. We are also cognizant of the AI risks and are investing in companies that are showing traction in integrating AI products to thier exisitng tools.
Portfolio Updates
Since our last published update, we have purchased 3 new investments: RSP, NOW, and ADBE. We are still accumulating shares and remain opportunistic on any selloff. Of note, RSP is more of a temporary holding, which we view as superior to money markets or cash. The market continues to show strength and we would rather participate in the upside instead of staying nuetral.
UnitedHealth Group (UNH)
UNH reported Q1 2026 revenues of $111.7 billion, a 2% increase year-over-year, surpassing analyst estimates of $109.45 billion. The growth was driven by strong performance in both Optum and UnitedHealthcare, with adjusted earnings per share of $7.23, leading to an increased full-year 2026 outlook..
CMS Rates: For 2027, the Centers for Medicare & Medicaid Services (CMS) finalized a 2.48% average payment increase for Medicare Advantage (MA) plans. This rate marks a significant increase from the 0.09% initially proposed in January 2026. THis was a big relief on the healthcare insurance industry as a whole.
Improved Cost Control: The company successfully managed elevated medical costs, with a medical cost ratio of 83.9%, which was 90 basis points lower than Q1 2025.
2026 Guidance Raised: Following strong results, UnitedHealth raised its full-year 2026 adjusted earnings guidance to more than $18.25 per share.
Global Payments (GPN)
GPN reported strong Q1 2026 results on May 6, 2026, exceeding analyst expectations with adjusted earnings per share (EPS) of $2.96, a 10% year-over-year increase. Driven by the Worldpay acquisition and strong Genius platform growth, the company generated $2.86 billion in adjusted net revenue, a 5.5% increase on a normalized basis.
Adjusted Net Revenue: $2.86 billion (+5.5% normalized; 4.5% in constant currency)..
Adjusted Operating Margin: 39.9%, expanding 110 basis points.
Shareholder Returns: Over $600 million returned via dividends/buybacks, with an additional $500M accelerated share repurchase initiated.
Full Year 2026 Outlook: Reaffirmed, expecting normalized constant currency adjusted net revenue growth of ~5% and adjusted EPS of $13.80 to $14.00.
Invesco S&P 500 Equal Weight ETF (RSP) - New Investment
As of March 31, 2026, the Invesco S&P 500® Equal Weight ETF (RSP) reported a steady Q1 2026 performance with a Year-To-Date (YTD) return of 0.63% at Net Asset Value (NAV), which outperformed the Market Cap Weighted S&P 500 Index.
We hold a position in RSP on a somewhat temporary basis. We expect to redeploy this capital into generational opportunities that we are seeing. We want to balance the risk of investing in cash, because we view the market and the economy to be strong. We also believe there is more risk investing in a standard market-cap weighted index and so chose the equal weight index instead.
Salesforce (CRM)
Salesforce reported strong Q1 fiscal 2026 results on May 28, 2025, with revenue of $9.83 billion (up 8% Y/Y) and non-GAAP earnings of $2.58 per share, both exceeding expectations. The company raised its full-year fiscal 2026 guidance, driven by AI momentum and Data Cloud, despite seeing volatility in shares and facing a competitive AI landscape.
Raised Guidance: Salesforce increased its fiscal 2026 revenue guidance to approximately $41.0–$41.3 billion.
AI and Data Cloud Focus: Growth was heavily supported by Agentforce and Data Cloud, with 60% of top 100 deals involving Data Cloud.
Data Cloud & AI: Data Cloud and AI ARR grew over 120% Y/Y.
Informatica Acquisition: The company announced an agreement to acquire Informatica for $8 billion to boost its data integration (ETL) and Master Data Management (MDM) capabilities.
Shareholder Returns: Returned $3.1 billion to shareholders in Q1, including $2.7 billion in share repurchases.
ServiceNow (NOW) - New Investment
ServiceNow reported strong Q1 2026 results on April 22, 2026, exceeding top-line guidance with $3.671 billion in subscription revenues (22% year-over-year growth). The company raised its full-year 2026 subscription revenue guidance to $15.735 billion–$15.775 billion and increased its 2026 AI-related revenue target to $1.5 billion
Subscription Revenue Growth (Constant Currency): 19% YOY.
Operating Margin: 32%, surpassing guidance
AI Growth: Now Assist customers (AI) with over $1 million in annual contract value (ACV) grew over 130% year-over-year.
Customer Wins: The company reported a 97% renewal rate.
Share Repurchase: The company completed a $2 billion accelerated share repurchase in Q1.
Adobe (ADBE) - New Investment
Adobe reported strong Q1 fiscal 2026 results on March 12, 2026, featuring a record $6.40 billion in revenue (12% year-over-year growth) and a non-GAAP EPS of $6.06, exceeding analyst expectations of $5.46. The company highlighted 13% growth in subscription revenue and a massive surge in AI-driven annualized recurring revenue (ARR), closing the quarter with $26.06 billion in total ARR.
User Base: Monthly active users for Acrobat, Creative Cloud, and Firefly surpassed 850 million, up 17% YoY.
AI-First ARR Growth: Annualized Recurring Revenue (ARR) for "AI-first" applications more than tripled year-over-year.
Firefly Momentum: Firefly subscription and credit pack ending ARR grew 75% quarter-over-quarter, while Firefly enterprise new customer acquisition grew 50% year-over-year.
Share Buyback: Adobe repurchased approximately 8.1 million shares in the first quarter, or roughly 2% of shares outstanding.
Across the board, our portfolio companies had solid earnings to start the year. In fact you would be surprised to see that the prices of these companies have sold off as much as they have just by looking at the overall strength in earnings. Our portfolio is much more tilted to software and long-duration growth names that we think are trading at ridiculously low prices. Regardless, prices can fall further still if the Saaspocalypse narrative holds. We don't see any negative impacts on our portfolio companies. We actually have only seen positive outcomes with the implementation of AI as additional revenue streams. Time will tell.
Summary
Overall, we finished 2025 on a strong note and made a transformational acquisition that is already reaping rewards for the fund. As we move through 2026, all of our portfolio companies continue to build strength and we are confident in our company valuations and upside potential. As you can see above, all of our investments are firing on all cylanders regardless of the current public sentiment, which changes constantly. We remain focused on long duration compounders and we believe that we have assembled a strong portfolio of cash generative business with strong growth prospects. As prevailing AI fears affect the stock prices of our software investments, we intend to continue to opportunistically add to our positions on any weakness. We'll see where the rest of the year plays out.
Sincerely,
Daniel Fas
Founder & CIO at Seaside Private Capital
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