Unleashing the power of generative AI for private equity
November 14, 2023
November 14, 2023
When one of Hemingway’s characters in the book The Sun Also Rises is asked how he went bankrupt, he answers “gradually, then suddenly.” Technological change happens much the same way. Small changes accumulate and suddenly the world is a different place!
Some PE firms have been gradually investing in their data and analytics capabilities for the past two decades. They have set themselves up to capture the unprecedented opportunities suddenly presented by the emergence of generative AI. Others will need to catch up quickly, as generative AI has the potential to revolutionize the investment lifecycle for PE, from fund-raising to exit planning, and from driving efficiencies to creating new business models for PortCos.
To wield its full potential, PE firms and PortCos alike have started identifying use cases and building capabilities that contribute to a Total Enterprise Reinvention mindset: a strong digital core, nurturing talent and driving effective change management.
The new generation of AI has the potential to transform companies and industries. The timeliness and effectiveness of its implementation will be determinative of who the winners and losers will be.
Stephen Schwarzman / CEO, Blackstone, in S&P Global, 28 August 2023
Whether accelerating target screening and due diligence through assisted research or enabling general partners to manage limited partner relationships through customized pitch decks, across the investment lifecycle, generative AI is lending PE firms an edge.
Take deal sourcing. When scoping private targets, a combination of robust data, machine learning and generative AI can help PE firms screen thousands of potential targets and shortlist them. This can reduce time spent by an eye-popping 50–60%.
BC Partners is an early adopter. They’re using generative AI for deal sourcing and due diligence, building APIs that will let pre-trained AI large language models work on unstructured proprietary data in ways that a human simply can’t.
Figure 1: Generative AI throughout the PE investment lifecycle
ChatGPT’s explosive adoption by the public marks a true inflection point for generative AI. Everyone everywhere can experience its innovative potential. While this technology is set to transform every industry and function, not all will be impacted at the same rate or level. Financial Services, Technology, Retail and Life Sciences are particularly ripe for disruption. Generative AI presents both defensive and offensive opportunities, with our research estimating a 6–7% productivity gain and a 3–4% revenue uplift.
Figure 2: Generative AI will transform work across industries (work time distribution by potential AI impact)
Within the PortCos themselves, generative AI has the potential to significantly affect business functions like customer service, knowledge management, sales and marketing, and product management. 40% of working hours can be impacted by large language models that underpin generative AI.
Figure 3: Generative AI will transform work across every job category (work time distribution by potential AI impact)
With so many potential use cases, the challenge is figuring out where to start. We recently worked with a $100B+ AUM PE firm looking across their PortCos to determine their use case prioritization and suitability to generative AI implementation. By assessing urgency, impact and readiness, we identified a combined EBITDA uplift of approximately $460M across four portfolio companies. These results cascaded into a high-level strategy and an implementation plan. It also informed their leadership about the future potential across the broader portfolio.
There are several ways that PE can start harnessing generative AI for the firm or its PortCos:
We recommend a four-step approach for private equity to understand and successfully implement generative AI:
While early adoption of generative AI can have huge upside, its successful implementation demands PE firms and PortCos take a strategic approach. Here are some considerations as you start your journey:
Like Marco Argenti, CIO of Goldman Sachs, noted recently in the Wall Street Journal: “We are way more than just thinking about it [Generative AI], we are really trying to prioritize certain use cases and then starting to invest in those.” To industry players who move beyond thinking to action, the competitive advantage could prove to be unassailable.