With leverage no longer the panacea it once was and holding periods lengthening, private equity has developed a new onus on performance and value enhancement. As general partners cast around for ways to achieve this, artificial intelligence has been picked up as a potential tool.
Bain & Co. has shared evidence of what – and how much – is actually being done to create value with AI in private equity holdings. Its survey on AI in private equity conducted in September sought feedback from private equity firms representing some US$3.2 trillion of assets under management with around 2,800 investee companies in their portfolios.
Expectations lined up around this value enhancement proposition certainly seem high enough for the medium term. Some 63% of respondents expect to see moderate value creation from AI within the next three years, and 30% expect significant value creation. Over a five-year horizon, those figures are 43% and 57%, respectively.
That said, few GPs see AI as a short-term fix. Around 65% expect to see minimal or no AI value creation within a year. Also, GPs seem to be cautious around deals exposed to AI: 65% stated that they had not closed 1%-20% of deals due to risks associated with AI exposure, while 5% had turned down 21%-40% of deals over such concerns.
Obviously, if AI is preventing some deals from closing, it is already a material issue.
As for the factors that private equity investors are looking for to generate value in targets, 83% say they are looking for tech and data readiness in targets – with 40% finding it – while 75% are looking for a bold AI strategy and vision in the targets, with 41% finding these.
A further 67% are looking for actual prioritised use cases with defined metrics and return on investment in targets, with 33% finding these. However, only 33% were looking for deep generative AI expertise and talent strategy, and only 25% were finding these.
Desired AI factors in target investments are clearly not yet where they could be in terms of satisfying GP demand. You have to wonder, though, whether such shortfalls are much worse than other conventional business strengths and advantages in targets.
As a factor in mainstream private equity investment rather than a horizon opportunity for farsighted venture capital investors, AI has already arrived. It will be interesting to see what difference it finally makes to the running and performance of private equity firms themselves.
