"The advancement of AI and NLP models has created many useful applications that make PE professionals' tasks easier. These tools ensure that all potential companies in the market are discovered, allowing professionals to focus on tasks beyond manual data crunching. AI is becoming a crucial asset in the industry."
How AI is changing Private Equity
Traditionally, private equity firms have relied on their team's expertise, networks, and extensive market research to identify promising investment opportunities and manage their portfolios. However, the process of sourcing deals has historically been time-consuming.
Now, the use of artificial intelligence (AI) is simplifying the process of leveraging data from various sources to the benefit of PE firms. AI can also streamline different tasks in a PE professional’s workday, saving significant time. New AI applications are designed to accelerate deal sourcing, track companies, perform market mapping, and optimize portfolio companies' performance, to name a few.
How Private Equity Professionals’ Tasks Will Evolve
The use of AI tools is reshaping the roles of professionals within the industry, shifting tasks from manual research and analysis to more strategic activities.
Historically, private equity analysts spent countless hours searching for companies and then analyzing and screening their prospects. The process of identifying potential investment targets involved extensive market research and internet searches.
However, AI platforms can now process and analyze unstructured data to build target lists and market maps. AI-based tools can already create long lists of potential targets, perform initial screenings, and generate company profiles. This allows analysts to focus on verifying AI-driven analyses, conducting in-depth company research, and building relationships with target companies.
Previously, PE firms could outsource tasks to lower-cost regions and focus on reviewing the reports. Now, the competitive advantage from outsourcing is diminishing as AI tools make these capabilities accessible to firms of all sizes. As AI-driven tools level the playing field, firms must shift their focus to effectively utilizing AI platforms.
Private equity firms are increasingly adopting a comprehensive industry mapping approach. Rather than focusing on individual companies, they're now casting a wider net by mapping entire sectors that align with their investment criteria. This broader perspective enables them to track company performance over time. Advanced AI platforms have made it possible to monitor a larger number of companies within these target sectors.
AI Use Cases for Private Equity Firms: From Manual Sifting to AI-powered Discovery
Tracking Companies: Getting Real-Time Insights
Private equity firms are increasingly able to use AI algorithms to monitor companies. The purpose-built AI tools excel at tracking patterns within market data, economic indicators, and news articles. Platforms like EQT Motherbrain utilize natural language processing (NLP) to analyze news, press releases, and social media, to detect changes in a company's environment and performance. Large language models surpass human capabilities in monitoring multiple sources of information at the same time.
Novel AI models can also play a role in generating valuation estimates for portfolio companies. These models can predict the success of future investments with greater accuracy by incorporating less tangible predictors of company performance, such as corporate culture, that traditional models might overlook.
Improved Deal Sourcing and Broader Analysis
AI-based platforms designed for deal-sourcing are becoming more popular across PE firms, not least because they reduce time used in collecting data about potential companies. These platforms scan data from diverse sources and quickly identify companies that align with investors' criteria. With natural language queries, AI is able to extract relevant information and combine the results into an exportable long list of companies.
For example, Inven analyzes millions of data points to find perfect matches for any search criteria. The platform allows users to quickly identify potential investment targets based on industry, size, ownership, and other relevant parameters. Inven employs cutting-edge NLP technology in its AI screener, which can perform initial analyses of target company lists. At its core, Inven helps PE firms find companies they might otherwise miss.
With cost-effective subscription models, these tools increase the value proposition for early adopters. Deal sourcing platforms enable a broader coverage on niche markets, and a more robust pipeline without significant additional resources.
More Complete Industry Analysis & Market Mapping
New AI applications are also transforming how private equity firms conduct industry analysis and market mapping. Traditionally, building a comprehensive understanding of an industry required extensive manual research, which was time-consuming and often provided incomplete insights. Now, AI-driven investment research tools with proprietary company profiles are being adopted by private equity firms. Extensive databases with advanced search features make it easier to find company information from any niche across the globe and summarize it into deliverable company profiles. This enables more productive investment research and ensures that firms gain a full picture of their industry.
AI-Powered Due Diligence: Monitoring Risks and Opportunities
One of the latest developments is optimizing the due diligence process by analyzing legal documents with AI language models. PE firms build customized AI tools to support contract analysis. These tools can screen large amounts of textual information, summarize it, and highlight potential legal risk factors, reducing the burden of cumbersome paperwork.
However, it's important to note that AI algorithms are trained on historical data and may not accurately predict future outcomes. Therefore, PE professionals' expertise remains crucial in interpreting AI-generated insights during due diligence.
AI Optimizing Portfolio Management
Choosing the Companies to Invest In: AI-Driven Portfolio Optimization
While AI tools can reduce the risk of missed opportunities, they can also support the screening of those opportunities. In the past, combining necessary information was labor-intensive. AI's ability to aggregate and analyze data points from various sources helps PE firms build more comprehensive company profiles. An AI algorithm can be trained to recognize changes in portfolio companies’ risk profiles, enabling firms to take corrective measures before a crisis occurs.
Beyond initial screening, some specialized AI tools can help optimize the holding period and timing of exits. Platforms like EQT Motherbrain are an example of how AI supports portfolio management.
Implementing AI-Driven Improvements in Portfolio Companies
AI applications can also enhance the performance of portfolio companies. For example, AI can be used to improve supply chain management, operations, or sales and marketing. By supporting and automating processes with carefully selected AI tools, portfolio companies can reduce costs and improve employees' overall work satisfaction. Meaningful adoption of AI can help companies gain a competitive advantage.
Many PE-backed firms are already using AI solutions in their operations, and the use of generative AI can influence their valuations and performance. Therefore, investment strategies, portfolio management, and value creation must be developed with AI's potential and impacts in mind.
A Look Ahead: The Future of AI in Private Equity
The rise of platforms like ChatGPT has demonstrated the speed at which AI can become integrated into everyday life and business operations. The current state of AI may be just the beginning. A report by McKinsey Global Institute suggests that AI could add up to $13 trillion to the global economy by 2030. Therefore, PE firms should develop a roadmap to scale solutions across their functions.
In the next few years, we can expect even more sophisticated AI applications for private equity. New AI models could be used in the due diligence phase to automatically analyze contracts on a larger scale, highlight unusual activity, and predict potential risks. Moreover, AI applications could change how PE firms analyze their portfolios' success by generating scenarios for changing circumstances. In this way, AI is likely to play an even larger role in investment decisions. EQT Motherbrain is already an example of this.
Furthermore, the integration of AI within portfolio companies is likely to become a key differentiator for private equity firms. Some firms are already turning companies within certain industries into “AI companies.” This means they purchase an innovative company within their target sector and implement AI-driven solutions to accelerate growth. Another option is the acquisition of AI companies to gain access to cutting-edge capabilities. Both strategies rely on AI to improve their portfolio companies' performance.
The Human-AI Partnership: Collaboration for Success
While AI is undoubtedly transforming the private equity industry, it is essential to recognize that it is a tool to support human intelligence, not replace it. The most important benefit of AI comes from reducing time spent on routine tasks. The nature of PE analysts' roles will shift from data analysis to complementing AI-sourced information with their expertise.
The most successful private equity firms will integrate AI tools into their processes while ensuring that human expertise and AI complement each other. Ideally, private equity professionals will confidently support their decisions with AI-derived insights, allowing them to dedicate more time to key stakeholder relationships.
The Power of AI in Private Equity
As AI continues to evolve, PE firms must create operational models that draw on both the intelligence of PE professionals and AI tools. The role of a private equity analyst is evolving from a data-driven, execution-focused position to a more strategic, value-added role. The future of private equity will be defined by firms' ability to adopt AI tools while maintaining a strong focus on their areas of expertise.
The integration of AI into private equity is still in its early stages. Pioneer private equity firms are already using AI tools as an integral part of their deal-sourcing processes and portfolio management. AI applications can also significantly improve industry analysis and market mapping. By adopting the latest AI advancements, private equity firms can create more value for their portfolio companies and stakeholders.
