The Impact of Generative AI on Private Equity

While Private Equity firms have the potential to leverage Generative AI internally, their most significant opportunity lies in enhancing the performance of their assets before exit.

Several large PE firms are piloting Gen AI-powered due diligence platforms. These platforms aggregate data from various sources to analyse consumer feedback, identify key opportunities and risks, and generate structured data for deal analytics. However, most firms are focused on the potential impact of Gen AI on the value of their investments, rather than on the development of tools for internal use.

The Gen AI Opportunity

Software-centric PE funds are intent on recognising sectors that are susceptible to Gen AI disruption and integrating this knowledge into their due diligence. A previously appealing target could quickly depreciate if it is exposed to disruption by AI-enabled competitors. Conversely, an asset with untapped AI up-side could demand a higher premium.

For PE firms with a diversified portfolio, Gen AI offers a new lever to enhance asset performance. If the portfolio companies of a medium-sized fund can use Gen AI to free up a substantial number of knowledge worker hours, this could potentially unlock an incremental exit value in the order of several billions of dollars.

The swift adoption of AI in sectors like education services, where PE-backed deals surged by 47% YoY according to S&P Global, illustrates the profound influence Gen AI is starting to exert on investment strategies.

However, the journey to these substantial gains is not without its challenges. PE firms must understand the new operational risks introduced by Gen AI, ranging from legal liabilities to cyber threats. Understanding these risks and factoring them into their investment strategy is crucial to fully realise the potential benefits of this technology.

In essence, the successful integration of Gen AI in PE firms hinges on their ability to balance the immense opportunities it offers with the unique challenges it presents.