Generative AI (GenAI) is transforming every industry, but private equity (PE) is among the sectors leading the way. The recent EY CEO Outlook Pulse Survey shows that 74% of PE-backed companies are already using AI solutions in their transaction process or are piloting potential solutions. In addition, GenAI has driven seven times more venture capital funding in the first half of 2023 compared with all of 2022. As the entrepreneur and CEO Garrett Scott puts it, “If the computer was a bicycle for the mind, this is a teleporter.”
I’ve been talking to clients who are embracing GenAI to boost their investment strategies and deal origination, as well as working with their portfolio companies to improve productivity and efficiency. However, are they approaching this transformative technology in the right way to unlock its potential?
Getting the strategic balance right
On the one hand, many PE firms are urgently exploring GenAI use-cases and pilots, intuitively sensing that this new technology will provide immediate value-creation opportunities. Some are already experimenting with large language models (LLMs) to analyze market trends and patterns, to manage documents faster and easier, and to automate back-office and customer-facing functions.
These are good instincts, but moving fast requires firms to address strategic challenges, too.
On the other hand, PE firms are already thinking about how GenAI might affect their investment strategies by transforming target verticals and horizontals.
And let’s not forget the broader risks associated with the use of GenAI, which go beyond legacy issues such as privacy and cybersecurity and now include biased training data or “hallucinations” – all of which can have an impact on value and reputation.
Getting the right balance of tactical and strategic decision-making, while managing potential risks, amid the hype surrounding GenAI can be difficult. So, what are the moves that PE firms can take to seize the opportunities of GenAI?
Fast moves
Before you dive into GenAI, here are key questions to ask yourself to make sure your first steps are fast and effective:
- Educate: To what extent are you familiar with current GenAI technologies and their potential implications in the private equity space?
- Explore: How can GenAI be integrated into your PE firm's operations, your portfolio companies, and the due diligence process? Are your teams, processes, analytics, and infrastructures primed to adopt this? How can you ensure stakeholders have confidence in your use of GenAI?
- Evaluate: How will GenAI impact the valuation and performance of your existing portfolio or prospective acquisitions? What strategies are in place to safeguard their interests?
- Experiment: What specific pilot projects should be prioritized for GenAI application in the PE industry? What metrics will be used to assess their success?
- Ecosystem: Which experts or partners in the AI realm should you collaborate with to ensure optimal deployment of GenAI within your PE framework?
Smart moves
These first fast-move actions will help you prepare a more strategic response to GenAI. Here are the key questions to ask next:
- Rethink: Beyond mere automation, how might GenAI redefine your PE firm's investment strategies, portfolio management and overall value creation? How can the technology bolster value across the entirety of your investment lifecycle?
- Roadmap: How will you convert AI-driven pilots into scalable, repeatable solutions for due diligence, portfolio optimization and risk management? What plans are in place to train and evolve your teams to leverage AI effectively now and in the future?
- Responsibility: Given the inherent risks associated with AI, how will your PE firm address and mitigate them? With AI regulations continually evolving, how will you remain abreast of these changes and ensure compliance across your organization and portfolio companies?
