Understanding and Embracing AI’s Jagged Frontier

For private equity firms and portfolio companies, artificial intelligence represents both unprecedented opportunity and complex operational challenges. The current AI landscape resembles a volatile market - areas of extraordinary potential returns alongside pockets of unexpected inefficiency. Understanding this "jagged frontier" of AI capability is crucial for making strategic investment and operational decisions in the coming years.

The metaphor of a jagged frontier captures the volatility of this market - a landscape marked by dramatic peaks of capability alongside unexpected valleys of limitation. Like early maritime explorers who discovered that coastlines were far more complex than they appeared on distant approaches, we're learning that AI's advancement doesn't follow a smooth, predictable path of progress.

Reality Check: The Paradox of AI Performance

Today's AI systems demonstrate capabilities that would have seemed impossible just months ago. They can conduct sophisticated market analysis, automate complex document review, streamline due diligence processes, and identify operational inefficiencies across portfolio companies. However, these same systems can falter on seemingly basic tasks - much like a highly specialized investment professional who might excel at complex deal structures but struggle with routine administrative work.

Moreover, like a coastline, the frontier is always shifting. The most popular LLM services are ChatGPT, Claude, and Gemini. One may claim superiority for a use case today only to be exceeded in performance by another next month. Including security, customization, and cost requirements can lead to considering open-source and developer-focused platforms like Hugging Face, Meta’s Llama, and Cohere’s Command.  To further complicate the frontier, well-established software vendors are adding AI features to remain competitive, and startups are building with an AI-first approach.

Strategic Implications: Rethinking Value Creation Timelines

Inconsistencies in AI performance creates a strategic imperative for PE firms and portfolio companies. The traditional playbook of operational transformation needs recalibration when dealing with AI integration. While the technology itself may advance rapidly, organizational absorption and value capture follow a different timeline. Consider that even after installing a promising technology, portfolio companies typically require 12-24 months to fully integrate and optimize new systems. AI implementation follows similar patterns - the technical deployment might take weeks, but achieving ROI requires sustained organizational change management.

Beyond the AGI Debate: Practical Considerations for PE

Additionally, the debate within AI research labs about the timeline to artificial general intelligence (AGI) holds important implications for PE strategy. Whether AGI arrives in one year or ten, firms must prepare portfolio companies for increasing AI capabilities while maintaining operational stability. This preparation extends beyond technical implementation to encompass talent strategy, organizational structure, and business model evolution.

The future of work will change radically. We know that many management teams that were slow to respond to the advent of software, the internet, and mobility/virtualization were left behind. By the time they recognized the competitive imperative, it was often too late to catch up.

Immediate Priorities: Capturing Value from Current Capabilities

For portfolio company executives, the immediate challenge isn't predicting AI's ultimate potential but maximizing value from current capabilities. Many companies are leaving significant value on the table by underutilizing existing AI tools, particularly in areas like customer service automation, supply chain optimization, predictive maintenance, and dynamic pricing. The opportunity cost of delayed implementation grows as competitors advance their AI initiatives.

Due Diligence 2.0: Evaluating AI Readiness

PE firms need to develop new frameworks for evaluating AI readiness in potential acquisitions and portfolio companies. Traditional due diligence checklists must expand to assess not just current AI implementation but organizational capacity for AI absorption. Key metrics might include data infrastructure maturity, process standardization levels, technical talent depth, change management capabilities, and competitive AI positioning within the industry

Building AI-Ready Organizations: The Executive Imperative

Portfolio company executives should focus on building "AI-ready" organizations rather than waiting for perfect technology solutions. This means investing in data infrastructure, updating operational processes, and developing internal capabilities that will enable rapid adoption of advancing AI technologies. The goal is creating organizations that can quickly capitalize on new AI capabilities as they emerge.

The value creation timeline for AI initiatives requires careful consideration. While some applications, like automated document processing or customer service chatbots, can deliver quick wins today, others require longer-term investment before generating returns. PE firms need to balance these timeframes against their hold periods and exit strategies.

Future Competitive Advantage: Beyond Technology Access

Looking ahead, competitive advantage will increasingly derive from how effectively organizations deploy AI rather than merely having access to the technology. This shifts the focus from pure technology investment to organizational transformation capabilities. PE firms should prioritize building robust data infrastructure, developing internal capabilities, and creating feedback loops for continuous improvement.

The rapid advancement of AI capabilities means that value creation strategies need to be ambitious yet flexible. PE firms should encourage portfolio companies to begin implementation with current technologies while building adaptable frameworks that can incorporate new capabilities as they emerge.

Conclusion: The Strategic Imperative

The jagged frontier of AI capability isn't just a technical challenge - it's a strategic opportunity for PE firms and portfolio companies that can effectively navigate this landscape. Success requires moving beyond simple technology deployment to focus on organizational transformation, capability building, and sustainable value creation. The firms that master this approach will find themselves well-positioned to capitalize on AI's evolving potential, regardless of exactly how or when AGI emerges.

The time for strategic AI implementation isn't in some hypothetical future - it's now. PE firms that help their portfolio companies build the right foundations today will be best positioned to capture value from tomorrow's advances. The key is developing approaches that balance aggressive implementation of proven capabilities with thoughtful preparation for emerging possibilities.

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NextAccess Authors: Scott Kosch and Valerie VanDerzee

NextAccess is an advisory firm of experienced operators with deep experience running top-performing organizations and delivering exceptional results. We help executive teams and investors build stronger, more valuable companies through a powerful mix of operational expertise, strategic insight, and data-driven solutions. 

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