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How to leverage generative AI to enhance private equity performance

Photographic portrait of Bridget Walsh

4 minute read 07 Nov 2023

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Harness GenAI in private equity with fast tactical steps and smart strategic moves.

In brief

PE firms must strike the right balance between tactical and strategic decision-making with GenAI.
They can use GenAI to drive value across their investment lifecycle and increase efficiency in portfolio companies.
GenAI requires PE firms to adapt business models to manage risks and increase value.

This article was originally published on LinkedIn.

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?

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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?

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Ask the tough question

As GenAI becomes more capable, there’s no doubt in my mind that it will disrupt existing business models and create exciting new ones. Although these impacts may take months and years to play out, strategy execution by PE firms must be informed by a combination of fast and smart moves – a solid tactical understanding of the technology coupled with a thorough analysis of wider business impacts.

I’m fascinated by how these new GenAI models could affect the multiples and exit strategies of PE firms in sectors most exposed to change.

Summary

GenAI is gaining prominence in PE as it drives investment decisions and improves efficiencies. PE firms need to strike the right balance between adopting GenAI quickly to enhance value-creation opportunities and addressing the strategic challenges and risks associated with the technology. They could continue to familiarize themselves with GenAI technologies, explore integration possibilities, evaluate the impact on valuation, and experiment with pilot projects.

About this article

Photographic portrait of Bridget Walsh

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.