The race is on to find ways artificial intelligence can boost productivity at private equity portfolio companies.
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Private equity fund managers are exploring how artificial intelligence and machine learning can add value by increasing productivity.
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And the speed at which companies adopt AI could prove to be a critical competitive factor.
"There's a value-creation opportunity and you need to take advantage of it in a relatively short window," said Richard Lichtenstein, an expert partner at Bain & Co. specializing in private equity and advanced analytics.
Early examples of companies leveraging AI tools to make salesforces more productive include tracking customer interactions, prompting salespeople to make timely follow-up calls and quickly drafting and sending personalized communications to clients. These early use cases are expected to spread quickly. Bain predicts that AI-powered chatbots that can understand and respond to natural language prompts will be the main way customers interact with most software and business websites within two years.
Getting started
Knowledge management is a key first step for any PE portfolio company preparing to take the AI plunge, said Steven Lee, a managing director with Alvarez & Marsal Holdings LLC's global transaction advisory group.
Many businesses are sitting on huge stockpiles of digital data, such as sales forecasts, contracts and customer records, that must be organized and integrated in a secure virtual location that is accessible to AI. The knowledge management process alone adds value to a portfolio company while also opening new opportunities to deploy AI tools, Lee said.
"Anywhere there's a plethora of data that you would want to synthesize and parse to make your decisions on, it's a huge, huge opportunity," he said.
Current generative AI can produce useful insights even from a relatively small, static data set "because so much of the thinking is already built into the model," he said. That is a big difference from previous versions of AI that needed to be trained on large volumes of data to master a task.
Private equity firm Hamilton Lane Inc. and investee company TIFIN AMP Inc. are developing an "AI-powered conversational investment assistant" targeting financial advisers.
The tool would allow financial advisers to get information, for instance, about financial performance in private markets by interacting with a chatbot, said Vice Chairman Erik Hirsch, who heads the firm's strategic initiatives.
"That chatbot is giving them quantitative data charts and analysis that is powered by that Hamilton Lane database, immediately back to them in a user-friendly way," he said during an Aug. 1 conference call.
Productivity and efficiency
Right now, the value-creation opportunities presented by new AI tools are clearest in consumer-facing, data-intensive industries like healthcare and technology, according to Nand Sharma, vice president of private equity at cloud computing company Rackspace Technology Inc.
AI's ability to automate tasks that are performed manually and help humans tackle their workloads faster and more efficiently is expected to increase margins by saving on costs, he said.
Private equity firms are leveraging the technology for internal use, with some of the largest firms in the industry leading the push to automate routine tasks and produce unique insights from proprietary data.
Limited partners appear to be well aware of AI's productivity improvements as a competitive advantage. According to S&P Global’s Investment Manager Index, based on a June survey of nearly 300 institutional investors, the biggest potential impact of AI on companies is "employee productivity" and "process efficiencies."
More than two-thirds of those surveyed said a company's AI strategy had at least a moderate impact on its attractiveness for investment.
Disruption
The rise of AI is also shaping broader investment themes for private equity firms as they attempt to position their portfolios to catch AI tailwinds and avoid the sectors and subsectors poised for disruption by the evolving technology.
Anything in the call center space is facing a "red alert," as are translation and transcription businesses, Lichtenstein said. At the same time, companies building and supporting AI systems are increasingly investment targets for private equity.
After slumping in the second half of 2022, private equity and venture capital investment in AI and machine learning rebounded in the first half of this year. In subsectors where AI could fuel rapid growth, like education services, there are early signs of rising PE investment.
Blackstone Inc. is scouring its portfolio for the potential winners and losers in the AI revolution, President Jonathan Gray said at a conference earlier this year.
"[We are] definitely trying to look at our companies and figure out who are most at risk of being disrupted. Can we protect them or exit those businesses? Which companies are the best? And I would say like everybody, we have dedicated teams, we're trying to figure this out," Gray said. "We do not yet have all the answers."