This week we reported that some private equity firms have been pressure-testing generative AI systems like ChatGPT – one of the largest and most powerful generative pre-trained transformer language processing models to date – and come up with ways on how to best use it across internal teams.
One US-based tech investor plans to hold a ‘hackathon’ next month that would see all departments – including deal teams, investor relations and accounting – brainstorm how ChatGPT could enhance their roles, while an LP told us how one of its GPs was mulling an algorithm that would enable a seat on its investment committee to be given to AI at some point in the next decade.
Even the largest PE firm in the world acknowledged that AI is bringing a major sea change in business models. “We have to figure out [which] businesses are going to be disrupted and avoid those, and figure out what mature businesses will be enabled by this and invest in [them],” said Joe Baratta, Blackstone’s global head of private equity in a Bloomberg podcast in April.
From conversations we’ve had with market sources, AI’s impact on the private equity industry is likely to play out across multiple areas. Two key areas that sources have identified are value creation and investment committee management. On the first area, rote activities in project management are likely to be highest risk, and the potential benefits are huge in what is essentially a “people-intensive business”, said a director at an Asian investment company.
“You can really focus on either the strategy or the relationships… and your ability to show your value will be in the emotional intelligence – or EQ – piece,” said the director.
The investment committee angle is also an intriguing one. At affiliate title New Private Markets’ Impact Investor Summit last week, Alison Humphrey, an adviser focusing on sustainable growth at investment bank PJT Partners, said she had been speaking to investors who have been using AI tools to help them prepare for IC when the “science of the business was a bit complex” and they needed help explaining particular points to their colleagues.
The private equity industry has, on the whole, been slow to embrace AI. Nearly three-quarters of respondents to a Private Funds CFO survey last year said their firms have yet to review AI adoption. Only a small number of firms are actively using AI in the investment process, with EQT’s machine-learning platform Motherbrain the best-known example of using AI algorithms in deal origination and diligence.
That said, PE and VC firms are stepping up investments in the space with 247 transactions worth $5.8 billion recorded in the first quarter of this year, up nearly 50 percent by aggregate value from the previous quarter, according to S&P Global Market Intelligence data. In venture, firms including Alumni Ventures and Sound Ventures have vehicles dedicated to backing companies leveraging AI and big data.
As this article was going to press, we were informed of an AI tool that can be used to conduct due diligence on private equity assets – evidence that generative AI is already being trained on PE industry-specific data.
Most industry participants we’ve spoken to in recent weeks said they are still weighing the potential and pitfalls of AI adoption. For GPs’ portfolio companies, it can be great news for customer support automation and optimising processes for product development. Clearly, when it comes to consumers’ views of AI as well as AI governance issues, there’s much for firms to chat about.