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AI In Private Equity: What It Means for the Industry

Artificial intelligence in private equity has been a topic that has provoked more interest in recent years as businesses look to take advantage of the commercial applications of AI in business settings.

In the vast majority of cases, organizations are implementing AI and automation for the purposes of improving the state of their operational workflows and increasing the level of efficiency in day-to-day tasks.

In this blog, we’ll be talking about what the use of AI in private equity means for the industry, how it’s used, and what the future holds.

Industry Overview

Private equity organizations have been adopting AI technology with increasing frequency in recent years, and many projects associated with artificial intelligence are finding themselves as priorities for the future.

PE firms and the industry at large has traditionally relied on institutional expertise among employees to predict trends and discover new opportunities for investment, most often today through CRMs, spreadsheets, and investment memos.

Appetites for process automation technologies, which can improve analysis and reporting of structured and unstructured data sets, are growing as firms start to recognize the benefits that can be garnered from improved insights into their portfolios and potential businesses lined up for acquisition.

As an indication of the impact that AI is having among PE firms, more than 90% of them predict that artificial intelligence will disrupt the sector within the next five years.

How Did COVID Change the Game?

As we just noted, private equity firms—much like law firms and other industries that rely on traditional methods of work—are very much rooted in workflows that are not digitized and oftentimes inefficient.

Related Post: Achieving Digital Transformation In Law Firms

When the COVID pandemic hit and worldwide lockdowns came into effect in early 2020, organizations were forced to adopt more sophisticated means for digital communication to better facilitate their work—virtual meetings, shared data, collaboration on documents are example of this.

The traditional ranges of productivity improvement of 3 to 5% per year have been overwhelmed by digitalization, with demonstrated potential for cost improvements well above 25%.

All of these things were essential for companies to adopt in order to continue doing their daily tasks, and PE firms were no exception.

It also opened up new opportunities and provided a basis for cultural change in organizations that otherwise would have been resistant to adopt digital solutions.

In short, the pandemic unearthed new avenues for growth from a digital standpoint among PE firms and precipitated a change in attitude and outlook towards the use of emerging technologies in their workflows.

Competition

The real, tangible benefits of implementing digital technologies should not be underestimated, and in the vast majority of cases AI in private equity firms is being driven by a necessity to remain competitive as much as anything else.

And this is not just regarding what you may expect concerning the kinds of digital solutions used—like AI and analytics for the purposes of portfolio management and investment opportunities—but also what we would consider to be of more conventional use.

This includes things like optimizing workflows within operations through robotic process automation (RPA), the streamlining of tasks and removal of paper-based processes, and an emphasis on monitoring customer preferences to provide more personalized experiences for those who use their services.

56% of private equity firms believe digital innovation was currently having the biggest impact on the back office, by generating greater operational efficiencies.

How Are Private Equity Firms Using Technology?

Portfolio Monitoring

Many PE firms struggle in the day-to-day management of their portfolio companies because of a lack of access to quality real-time data.

This is because they rely on traditional methods of data reporting and manual analysis, typically through Excel spreadsheets or similar.

These processes are outdated when compared to the methods used by competitors, meaning PE firms that are not digitized have a tendency to struggle when it comes to reporting financial performance, KPIs, timely analysis on portfolio company business drivers, environment, sustainability, and governance (ESG) reporting, and tax and financial statement automation.

Building a strategy for how data is governed—particularly with regard to how information is accrued, stored, analyzed, and reported—is crucial in ensuring these issues are addressed and a data-driven environment for portfolio monitoring is established.

These technologies will typically be hosted on a cloud data platform like Azure or AWS with integration of analytics platforms like PowerBI.

Screening

Screening for potential targets is another area where a lack of analysis capability is causing issues in how private equity firms approach their work.

The inability of organizations to assess data on the companies they have an interest in means that they are unable to act in a timely manner.

Implementing a growth strategy today depends on the data necessary to back it up. This means for PE firms be able to perform due diligence effectively.

The use of data and analysis and AI can help companies set out a clear criteria for what constitutes good value for an investment.

By assessing the risks and costs of a potential investments through data analysis, the value proposition of an investment can be quantified and standardized for a better standing over competitors when it comes to risk analysis.

Back-office Processes

As we previously spoke about, everyday processes in private equity firms are frequently outdated and inefficient.

In data terms, this means that workflows containing important information are not integrated into platforms that can leverage that data, the result of which is an inefficient set of processes—many of them manual—that create an environment in which information is not received and handled by stakeholders quickly enough.

Robotic process automation (RPA) technology is being used by private equity firms to streamline workflows by using AI to automatically facilitate the transfer of data instantaneously without the need for manual intervention.

As a result, not only are workflows streamlined and the right data gets to the right place at the right time, but oversight of information and standards for cybersecurity can be implemented to keep the firm in compliance.

Bottom Line

AI in private equity is a rapidly growing area of interest for organizations today.

In an industry that is in many cases rooted in traditional processes and workflows, digital adoption has been slowly taking hold as businesses begin to see the competitive advantages that can be sought through the implementation of technology—especially as it concerns portfolio management, investment opportunities, and the streamlining of internal working processes.

We can expect to see the levels of adoption of AI in private equity continue to rise in the coming years as they recognize the substantive benefits that come from tech implementation in working processes.

If you’re in need of digitization for your private equity firm, consider visiting our Digital Innovation page and learn how process automation and data analysis platforms can be integrated into a cloud-based enterprise resource planning system for the benefit of your organization.