Artificial intelligence
Most LPs see AI adoption among GPs as a way of achieving cost-efficiency, but they also expect it to widen return dispersion.
With GPs rolling out artificial intelligence (AI) tools across their firms, less than a quarter of LPs (22%) believe the use of this technology will become a source of alpha in the next five years. Instead, most (70%) are expecting GPs to use AI primarily to bring down costs.
Even so, LPs anticipate that AI will affect return dispersion. Around two-thirds (67%) of respondents expect AI adoption to widen the gap between the best performing funds and the laggards, with just a third believing that it will level the playing field. Given the findings above, this may seem counterintuitive. However, LPs may be expecting the best performing GPs to implement AI effectively both in their own firms and in portfolio companies, which could improve returns.
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Our Barometer suggests mixed opinions on the impact of AI in private markets right now.
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Most LPs don’t think AI will drive outperformance, but two-thirds expect it to widen the gap between winners and losers anyway.
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According to the data, 70% of LPs believe GPs will use AI primarily as a cost efficiency tool over the next five years. Only 22% see it as a genuine source of return outperformance.
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But ask the same LPs about competitive impact, and 67% expect AI to widen return dispersion between leading and lagging managers.
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On the face of it, that’s a contradiction. If AI is just about cutting costs, why would it reshape the league tables?
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One possible explanation is the cost savings LPs have in mind aren’t only at the GP level.
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They could also be playing out inside portfolio companies.
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AI-driven efficiencies on operations, finance functions, customer service, if that’s where gains land, they flow through to margins and exit valuations.
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Which would mean the GPs deploying AI best practices across their portfolios pull ahead, even if the headline framing is cost efficiencies.
LPs are also increasingly adopting AI in their own organisations. Should this reduce the amount of time required for administrative and analytical tasks, around half of LPs expect to spend more time focusing on their own strategic or team development (54% put this in their top two) and cultivating new GP relationships (with 49%). Just 16% rank developing direct investment capabilities in the top two activities they would prioritise.
Even as analytical and quantitative AI tools are improving, most investors believe there is no change to the importance of gut instinct in private markets investing, underscoring the importance of human relationships and judgement in the asset class. Nearly a quarter (22%) of LPs believe that gut instinct is increasing in importance when making fund and co-investment decisions. Fewer (16%) say this about GPs’ company investment decisions.
