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AI is poised to shake up private equity

By Rich Klee,

Firms that fail to embrace the transformative technology will be left behind

The idea that artificial intelligence is the stuff of science fiction is a fallacy. Today, the technology is a commodity. We use it every time we open Google Maps, rely on predictive text or when our fridge intervenes to tell us we shouldn’t be snacking at 11pm.

Public market algorithmic trading is also dominated by AI, of course. But private equity remains slow to embrace this technology. While the use of basic data analytics is now pervasive in PE, final decision making continues to be weighted towards opinion and qualitative assessment.

And yet it makes total sense to employ AI to find a signal in the noise in the growing number of areas where data can be leveraged for due diligence. There are whole streams of valuable pre-deal analysis currently outsourced to consultancies at great expense, or else sidelined completely, that could readily be handled by emerging AI tools.

Indeed, the availability of data required to train these tools has increased dramatically over the past decade and particularly in the past two years, as companies have pivoted their business models online in order to weather the pandemic.

Data is the currency of business today and firms that fail to establish the culture, processes and tools to leverage that data will be left behind.

At Palladium, our SaaS product Prism uses AI to analyse public data about a target business, its competitors and the wider market to help private equity firms better understand a potential investment opportunity.

In this way, we are able to give a rapid assessment of a company’s performance and identify potential red flags even whilst privileged inside data is off limits to a potential buyer in the early stages. A good example of how Prism intends to achieve this is by using natural language AI to analyse a target’s website and make comparisons between time periods. In this way, we can track what skills they are looking to recruit through the job ads, and which key staff have left and joined from the team pages.

AI can also be employed to lead non-technical deal teams through data intensive analysis by making data and charts explainable. It is all very well presenting data, but if the narrative behind that data can’t be comprehended in the right way, it is worse than useless, it is downright dangerous.

Prism, for example, is exploring technologies such as GPT-3, which has been used to write whole blog posts and even comedy sketches and is the most powerful language comprehension and generation tool available, to write automated diligence reports that sit alongside the data.

Laying the foundations for AI

Indeed, whilst the use of AI in due diligence typically remains the preserve of specialist advisers like us, we do believe it can and must play a greater role in the asset class as a whole and we are pleased to see a small but growing number of tech savvy firms tentatively exploring more advanced applications.

The most common use case appears to be deal origination and curation, which makes sense given intense competition for deals. But for many firms, there is still a cultural shift that needs to take place before AI can be fully embraced, with greater weight placed on the value of data and less on earned acumen.

Once that shift has taken place, the investment required to build a data team and data warehouse will inevitably follow. AI can only be properly leveraged when the building blocks of appropriate data collection and standardised data processes have been established. For many, perhaps most, private equity firms, a lot of that foundation work still needs to take place.

And yet, private equity firms cannot ignore the dominance of data and the tools for leveraging its power for much longer. Technology follows the money and, as we all know, vast sums have been flowing into private equity over recent years.

If that continues, it seems inevitable that big tech companies, or hedge funds armed with teams of technology infused quants, will make a move on the asset class. Some form of algorithmic private equity firm that places a bias on data over subjective business acumen, fireside chats and handshakes is bound to emerge.

Indeed, we could theoretically see a completely hands off investment cycle akin to algorithmic trading. A private equity bot would be programmed with investment criteria. Or, to put it another way, a firm’s DNA would be expressed in code. That bot would then systemically select deals and build the investment committee case. Clearly, there would still be a human rapport angle, with deal teams responsible for building relationships with the management team. Everything else, however, would be defined in code and decisions strictly weighted based on the available data.

But there we do stray into the realms of the improbable. The reality, of course, is that private equity will remain a fundamentally people-based business, with human capital augmented, and not replaced, by this exciting technology. AI should be seen as an opportunity and not a threat.

There is no doubt, however, that the world is changing. Data is the currency of business today and firms that fail to establish the culture, processes and tools to leverage that data will be left behind.

Palladium is an award-winning digital and technology due diligence provider and digital transformation partner to Private Equity firms and their portfolios across Europe and the US, providing advisory services throughout the transaction lifecycle. Palladium was named Gold and Overall winner at the International Digital Experience Awards 2021.

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