4. Using AI to power the technology agenda
At a time when companies are under financial pressure, there’s less appetite for large digital transformations. Therefore, funds are focusing on ways to get more value from the technology they already have.
The rise of AI is causing many private equity leaders to revisit their technology priorities. AI’s potential impact has become more prominent in due diligence over the past year. Funds are asking questions such as: How AI might disrupt a business, its operating model, and its balance sheet? Where will AI create opportunities, and where might it be a threat? How AI might lower barriers to entry, either allowing competitors into a market or creating opportunities for the business to enter adjacent markets and segments?
Alongside this strategic thinking, funds are doing a lot of practical work to prepare their businesses for AI, such as by generating or gathering the kind of data that effective AI requires. AI is also driving greater value on sale, due to a re-rating or higher multiple. Our recent PE Pulse survey found that nearly 85% of GPs expect AI to have a significant or transformational impact on the way they do business over the next 5+ years. However, only 4% of CEOs interviewed in our October CEO Outlook Pulse said they were leading when it came to the maturity of their AI strategy.
Priorities to consider include:
- Finding generative AI (GenAI) use cases you can execute now: Leading firms are identifying and prioritizing GenAI use cases that can deliver the most value, driving business growth and operational optimization. They put the right foundations in place to ensure a successful implementation, such as high-quality data, an innovative culture, and a focus on ethical and responsible use of GenAI.
- Pushing for tangible benefits faster: Firms are achieving success by considering AI beyond a long-term initiative but pushing for the technology to deliver tangible benefits faster. They’re adopting a tactical approach to AI deployment to realize benefits quicker and establishing and initiating an AI-based roadmap at the deal due diligence stage so that it helps increase a portfolio company’s attractiveness (return) upon exit.
- Getting your data ready: We are seeing firms implement robust data governance frameworks and data quality management processes to ensure the data is clean, complete, and reliable for AI applications. They are investing in data platforms and infrastructure to integrate disparate data sources to create unified, AI-ready data lakes.
5. ESG is a catalyst of value creation
Adoption of ESG principles has risen dramatically. In 2010, GP signatories of the landmark Principles for Responsible Investment (PRIs) amounted to just 155, according to Pitchbook. Today, they number more than 2,000. Most importantly, sustainability has moved beyond compliance exercises to an integral part of the value creation strategy. If a business can’t satisfy ESG reporting requirements, some initial public offering (IPO) routes will be closed when it is time for exit.
Another reason funds are more likely to stick with a progressive ESG approach is that the investment they’ve received often comes with ESG commitments attached. While ESG’s contribution to an investment shouldn’t be overestimated, PE funds are more likely to see ESG as a source of value rather than a risk issue.
Priorities to consider include:
- Addressing evolving global macro trends and the growing number of sustainability-linked regulations: Leading firms are implementing comprehensive ESG reporting frameworks and controls to ensure regulatory compliance, as well as developing roadmaps to achieve net-zero targets and access green financing/incentives.
- Embedding core ESG principles into a portfolio company’s corporate strategy: Many firms are conducting ESG maturity assessments and integrating material ESG factors into business strategy, operating models, and value chain activities to build long-term resilience.
- Staying ahead of evolving consumer and stakeholder demands: The way forward can include sustainable strategies and approaches to capture top-line and bottom-line growth over the long term.
Relentless focus on value creation
While some funds are holding companies longer, that doesn’t mean they are slowing the pace of value creation. PE has always had an interventionist approach and a relentless focus on what matters most.
In these uncertain times, firms can innovate and adapt their approaches, and help portfolio companies optimize performance during extended hold periods, while still building in agility, for optionality and speed of exit when an opportunity arises.
This EY article is part of a sponsored content series as seen on hbr.org.
