How private equity can harness AI

A few short years ago, artificial intelligence (AI) was almost entirely absent from the discourse around private equity. Today, it is omnipresent, dominating industry headlines and headspace. For the asset owners, managers, and advisors involved in private equity, the tremendous potential of AI to enhance the way we work, the decisions we make and the outcomes we achieve, is both undeniable and tantalizing.

But for all the hype generated by this powerful new tool, there is still a lack of context available about AI as a specific set of practices applicable to private equity.

As head of business for our iLEVEL portfolio monitoring solution at S&P Global Market Intelligence, I have a front-row seat to the innovative use of AI within our own technology solutions. My work also brings me into proximity with a global community of private market participants who recognize AI's tremendous potential but need more guidance on how they can best leverage it in their own workflows.

Navigating the possibilities

The uses of AI are limitless, and some of the leading-edge applications of this technology are generating remarkable results. For example, colleagues in our Quantamental Research team recently used natural language processing to conduct sentiment analysis of transcripts of the Q1 earnings calls of publicly-traded private equity firms. The results highlight a significant rebound in private equity confidence over the last two years, along with other insights into the state of the market, the deal environment, interest rates, performance expectations and more (you can read the full results here).

The same protocol could help GPs accelerate capital formation by identifying investors whose objectives best align with the opportunities they plan to bring to market, or give LPs a window into what the entire portfolio is thinking, doing, worrying about and planning for, based on sentiment analysis of their quarterly GP letters.

But as we look toward the future, we also need to focus on today. Where can GPs and LPs see the greatest value from their investment in AI right now? Based on what we're seeing in the industry and within our own client base, I believe the following areas are the most promising:

Workflow automation. Automation has enabled organizations throughout the industry to allocate resources more effectively for decades. But AI represents a quantum leap forward, automating more complex and time-consuming activities, such as data matching and mastering, and error trapping, with significantly higher levels of accuracy.

Forecasting. Forecasts are notoriously difficult to get right. AI is enabling asset managers to perform more accurate, nuanced forecasts by consuming a greater breadth of data and running multiple formulas to examine a range of outcomes.

Data consolidation. Many market participants have built repositories for structured data sources such as spreadsheets and databases, but AI is making it possible to enrich these repositories with the data embedded in unstructured sources such as PDFs, emails, PowerPoint decks and more.

AI for GPs

For GPs, we see a tremendous amount of investment in technologies that enable them to collect, generate, consolidate and analyze novel market and investment data at key points in the workflow.

As part of our 2024 Private Equity and Venture Capital Outlook, we polled more than 181 private equity professionals for their views on AI. The results show GPs expect significant benefits for their workflows. The aspects cited as the most likely to be impacted are deal sourcing and target identification (54%) as well as due diligence (53%), followed by valuation analysis (37%) and portfolio management (24%). But how exactly is AI being applied? Here are some of the most compelling examples:

Capital formation. AI is helping GPs sift through massive amounts of data on investors to identify the most advantageous sources of capital, determine the winning approach and perform initial due diligence.

Deal scouting. AI is also helping GPs wade through a sea of investment opportunities and winnow them down to the small number of high-conviction prospects that are worth their time.

Value creation. Value creation is perhaps one of the most exciting uses of AI. While GPs are used to analyzing data at the portfolio level, it is the tip of a very large iceberg. AI lets managers dive below the surface to analyze portfolio-company data in ways that generate market insights and create more efficient operations across the portfolio. For example, a firm that invests in consumer-focused retail companies might collect and analyze credit card data, and store traffic patterns and consumer credit ratings to optimize pricing and consolidate vendors across the portfolio.

Exit optimization. AI is helping GPs analyze a range of market and investor data to determine what acquirers are in the market and identify those most likely to demonstrate interest. It is also helping GPs determine pricing by comparing the historical performance of the asset against comparable public companies.

There is considerable cost and complexity associated with these data-intensive use cases, but solutions, such as S&P Capital IQ Pro for accessing and analyzing structured and unstructured sources of market data, and iLEVEL for normalizing and ingesting valuation data into the workflow, are bringing these capabilities within range of smaller asset managers.

AI for LPs

LPs have struggled to gain a window into fund performance and investment opportunities because information is sent from multiple sources, reaches them in a variety of formats and is stored on a multitude of platforms. AI promises to unite these data sources and deliver a meaningful view of the portfolio by advancing crucial data management capabilities.

When asked as part of our 2024 Private Equity and Venture Capital Outlook, 42% of LPs said they feel AI will be used for front-office work, such as simpler administrative tasks, and a40% said they are looking to use it as a supplementary check against their work involving data. This is particularly true for smaller firms (AUM below $500 million). Other areas include due diligence on potential investments (23%) and assessment of investment risks (14%).

Here are a few tangible examples of how AI can add value by streamlining data-intensive workflows:

Data extraction. Financial statements, GP letters, capital accounts and cash flow notices hold a wealth of information, but much of it arrives in unstructured formats and different media types. AI technologies, such as natural language processing, are purpose-built for the task of extracting this data and creating greater visibility across investments. As a data services provider to GPs, LPs, and investment consultants, the iLEVEL team is focused on maximizing data capture for our clients from every available source.

Data mastery. Even structured data can create problems for LPs who need to consolidate it into a single source. Discrete but overlapping data sets in an LP's CRM, market database and portfolio monitoring platform mean there is no single window through which they can see their interactions with the GP, the funds that GP is bringing to market and the performance of existing funds they manage. By cleansing, mastering and consolidating these data sets, automated platforms such as S&P Global's EDM make possible that holistic view.

Accelerating transparency

Our industry has been working toward greater transparency for well over a decade, a shift that has necessitated the sharing of exponentially greater volumes of data. And the majority of that data has remained buried in PDFs, emails and other unstructured sources.

AI has enabled us to bring that hidden data into the light and use it to drive greater control, understanding and value. Transparency unleashed a deluge of data; AI is giving us the tools to make sense of it. With the ability to extract, normalize, consolidate, and analyze data at scale, our industry is poised to become nimbler, more efficient and better informed than ever before. As the industry races to uncover the full value of this technology, now is the time to partner with a trusted provider with the expertise and commitment to use AI to expand their capabilities.

Learn more about AI in private markets at our Interact conference in New York on October 15-16.

Learn more about iLEVEL and our other private markets solutions, services and data.