Cracking the Code: How AI Will Reshape Private Equity
More than three-quarters of large organizations report that they now use AI in at least one business function according to McKinsey. The investment landscape mirrors this acceleration, with funding for GenAI surging, nearly octupling from 2022 to reach $33.9 billion in 2024.
Despite this massive increase in AI investment and adoption by Fortune 500 companies, a substantial proportion of PE firms have been slow to adopt AI technologies. S&P Global data indicates that only 41% of private equity firms are in early adoption stages and only 13% are at an advanced implementation stage. This disparity signals a clear and present opportunity for competitive differentiation for early and effective adopters.
In September 2024, Bain surveyed private investors representing $3.2 trillion in AUM. Nearly 20% of portfolio companies had operationalized GenAI use cases with positive results. For frontier technology that has only been available for less than three years, this is an impressive outcome. We believe that the competitive landscape within PE will increasingly be defined by a firm's AI maturity. Firms that lag in AI knowledge and daily use risk falling behind in crucial areas of the investment lifecycle, including deal sourcing, closing deals, and portfolio value creation. The urgency to adopt AI is heightened by the opportunity to extend AI adoption to portfolio companies.
AI Technologies and Their Applications for PE Firms
AI technologies offer distinct functionalities that can be leveraged across multiple areas within a PE firm's operations, as summarized below:
Challenges and Considerations for AI Adoption in PE
While the benefits of AI adoption are significant, PE firms face several challenges when integrating these technologies into their work processes. These include data quality and accessibility, commitment to upskill staff, ensuring data privacy and security, and the need for expert talent. Overcoming these hurdles is crucial for successful AI integration and maximizing ROI.
Navigating the path to efficient and effective AI adoption can be perplexing. Simply learning how to use ChatGPT, Gemini, and Claude effectively can feel as frustrating as building a chest of drawers from Ikea with minimal instructions. Meanwhile your social media feeds are flooded with ads for costly online courses and virtual conferences that claim they can train you to use AI effectively in your job–yet they don’t know what your job is or even in which industry your firm operates. There are seemingly endless blogs and newsletters (this one included!) where you can learn more about AI, but curating what articles your staff should read and what videos they should watch would require an experienced team dedicated to that task alone.
Which AI vendors will be the most useful to the unique tasks in your PE firm or your portfolio companies? Will their tools integrate with existing technology stacks? How will your team scale the AI learning curve while still being effective in their jobs today? The right answers aren’t to be found from cookie cutter presentations.
Cracking the Code: A Strategic Approach
The path to effectively integrating AI into private equity and portfolio companies is not a one-size-fits-all solution. It requires a strategic and tailored approach that acknowledges the unique challenges and opportunities within each firm. To truly "crack the code" of AI adoption, PE firms must focus on:
Targeted Education and Training: provide relevant, industry and functionally specific training that empowers staff to leverage AI effectively in their daily roles, moving past broad overviews to practical application
Customized Implementation: move beyond prompt engineering to solutions that integrate with existing workflows and address specific PE functions, from deal sourcing to portfolio management
Vendor and Technology Alignment: select AI vendors and technologies that not only offer powerful functionalities but also align with the firm's technology stack and long-term strategic goals.
By taking these steps, PE firms can move beyond the nascent stages of AI adoption and unlock the significant competitive advantages that AI offers, ensuring they remain at the forefront of the evolving investment landscape. The time to crack the code is now.