Side Letter: PE’s AI revolution; Alaska’s PE cuts; China’s zero-carbon cash

Private equity participants are already thinking about how the artificial intelligence revolution can give them an edge over peers. Plus: Alaska Permanent Fund is cutting its private equity allocation due to concerns over valuations. Here’s today's brief, for our valued subscribers only.

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What will the artificial intelligence revolution mean for the private equity industry? That’s one question Side Letter has been putting to market participants in recent weeks as global industries race to comprehend how AI can improve their processes and what this could mean for jobs. PE appears to be no exception: the founder of one US-based tech investor, for example, told us the firm 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.

Ahead of the hackathon, team members are already pressure-testing ChatGPT, the founder said, noting that there’s a growing awareness within the firm and among portfolio company bosses that the technology will “revolutionise” how they work. “For management, they’re doing a lot of soul-searching in the businesses they own, while for us we think of it more as first-draft machine with regard to answering ESG questionnaires, for example, or writing letters to investors,” the founder said.

It’s unlikely to stop there. A director at an Asia-based investment company told us one of its GPs hopes to give a seat on its investment committee effectively to AI at some point in the next decade, noting that the manager is mulling an algorithm that would facilitate this. “It is incredibly forward thinking – it’s slightly scary because for us as investment professionals, you remove the human element,” they said. “It remains to be seen whether that will even be feasible, but clearly folks are thinking about this.”

How is your organisation thinking about AI? Let us know here.

Alaska cools it
Alaska Permanent Fund Corporation – once known as one of PE’s most enthusiastic and esoteric investors – is now headed in the opposite direction. The $76.4 billion system approved a recommendation last week to slash its PE target to 15 percent by FY 2025 – reversing a plan that would have gotten the target up to 19 percent by that year, our colleagues at Buyouts report (registration required). Alaska’s PE target stands at 17 percent.

“I don’t think PE is very attractive right now,” chief investment officer Marcus Frampton said when quizzed by board member Ellie Rubenstein – daughter of Carlyle Group co-founder and PE luminary David – why the board was not considering upping its target and pacing in the current environment. Frampton added that high multiples, rising interest rates and the amount of dry powder factored into his decision.

Frampton did note that APFC could quickly pivot if conditions became more favourable – especially after the board also approved the creation of a “tactical opportunities” asset class. This new portfolio, which will have a 2 percent target allocation in FY 2024, gives investment staff the flexibility to invest in public and private market opportunities.

APFC’s sentiment is at odds with its peers, many of which have lifted their allocations in recent months to accommodate PE’s outsized position relative to public equities. Clearly, Frampton sees something CIOs at the likes of the California Public Employees’ Retirement System, Los Angeles Water and Power Employees’ Retirement Plan and the California State Teachers’ Retirement System don’t.


Light at the end of the tunnel?
Yes, the fundraising picture may seem bleak at present. The good news is that conditions are expected to improve. Some 81 percent of alternative fund managers said fundraising will be higher in the coming 18 months compared with the past 18 months, according to a survey by fund services firm Ocorian. Almost all are confident about launching new funds and 91 percent said they’re expecting more alternatives fund launches this year compared with 2022.

The survey comes as numerous funds close below target. “While it’s still a challenging economic environment and with a number of geopolitical issues making fundraising more difficult in some markets, it’s encouraging to see how positive alternative fund managers are feeling about the year ahead,” Paul Spendiff, head of business development at Ocorian, said in a statement accompanying the survey.

Among different asset classes, PE is expected to benefit the most from fundraising over the next 18 months, according to 73 percent of managers surveyed. That’s followed by infrastructure (68 percent), real estate (65 percent), private debt (59 percent) and hedge funds (49 percent). Spendiff also noted that high-performing managers with good governance and transparent ESG approaches will benefit most from improving sentiment in the market.

China’s carbon cash
PE’s zero-carbon revolution is gaining ground in China. IDG Capital, a China-based VC and growth firm, has held a 5 billion yuan ($713 million; €656 million) first close on its Zero-carbon Technology Investment Fund, per a statement from Hong Kong natural gas provider Towngas, which co-launched the vehicle. The fund launched in 2022 with a 10 billion yuan target, according to Private Equity International data.

LPs include local governments, sovereign wealth funds and local and foreign insurers. The fund is managed in Changzhou, China, and will invest in the region’s start-ups that focus on areas including solar energy, smart grid, hydrogen energy and carbon trading. According to a September report from Generation Investment Management, private and public investment in the clean economy is surging towards $1 trillion per year, with China leading the way.

Today’s letter was prepared by Alex Lynn with Carmela Mendoza and Katrina Lau.