The evolution of the global economy has been largely driven by the disrupters that have revolutionised the way people work and live. Digitisation and artificial intelligence (AI) have been hailed as triggering the fourth industrial revolution. Private equity (PE), like other industries, is being influenced by, and stands to gain from, digitisation and AI.
While the amount of money flowing into PE funds is increasing steadily, the disparity between the number of PE firms and available attractive investment opportunities has led to increased competition and rising asset prices. Accordingly, PE firms are always looking for innovative solutions to gain a competitive edge. Studies show that PE can use AI in three key areas: deal identification; due diligence (DD), and the ongoing management of portfolio companies.
Traditionally, PE firms and venture capital funds have made investment decisions based on asymmetrical information and the inherent biases intrinsic to the manual research process. This narrows the options available. By using AI, PE funds can eliminate these biases and track a wider range of opportunities. AI can mine data sets ranging from the number of job postings of a target to social media mentions, satellite imagery and the number of social media engagements, and filter thousands of companies. AI can then use the mined data to identify untapped markets and unique investment themes, and target companies that might provide high returns. The covid-19 pandemic has forced most businesses to work remotely and restructure their technological presence. This has expanded their viable data reserves, making it the perfect opportunity for AI-led deal identification.
A study by the French professor, Thomas Astebro, has demonstrated the impact of using AI for deal identification. As well as others, the study examined Jolt Ninja, the unique AI-based decision support system developed and used by the French venture capital company, Jolt Capital. Jolt Ninja, in effect, learns the preferences of each Jolt Capital partner in terms of likes and distributes to imitate their decisions when filtering through data to identify target companies. Jolt Ninja has minimised the waste of resources and ensured higher operational efficiency. Potential deals are initially analysed by the partner’s digital assistants instead of junior-level associates. While scaling this technology in a resource-rich industry will be a challenge, its impact could revolutionise the way the industry operates. Users will be able to identify deals faster and at a lower cost, thus gaining first-mover advantage.
AI can also increase efficiency in the DD process. AI can learn and comprehend complicated legal concepts faster than the average human. Accordingly, AI can assist lawyers and other individuals involved in the DD process by reviewing multiple documents and summarising key details with greater efficiency and accuracy. However, AI products for DD will still need to be driven by lawyers as the clauses identified and summarised will need to be analysed by lawyers to determine their impact. In effect, while AI may lessen the numbers of lawyers tasked, the role of the lawyer will be paramount in making sense of the data AI extracts.
PE firms can also use AI for the automation and centralisation of repetitive functions such as accounting, invoicing and payment processing, which can minimise costs during the management of assets.
The adoption of AI by PE firms will not just be an effort to stay ahead of the curve. Its generational impact will long outlast the temporary, and perhaps even permanent, competitive edge provided. As in any disrupted industry, the inability of existing players to adapt to new technologies will accelerate their exit either because of the loss of opportunities to newer, AI-enabled PE players or because of the intensive, AI-supported efforts of existing players. Further, general partners will be able to leverage the efficiency offered by a data-driven approach and eliminate human error. This will augment their core capabilities at a lower cost. It will also provide more compelling investment opportunities for limited partners. The use of AI is, therefore, an imperative for the long-term success of any venture in the digital era.
Vandana Pai is a partner and head of the investment funds practice, and Shreya Sreesankar is an associate at Bharucha & Partners.
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