Implementing AI
Beyond digitalisation in general, the research suggests that PE firms have been particularly proactive in adopting breakthrough technologies – most notably AI. Following the introduction of AlexNet, a landmark research development in the current AI wave, companies in sectors ripe for AI-driven transformation were more likely to be targeted by PE investors.
“We found that investment in AI-related capabilities in particular increased significantly after major AI advancements,” says Srinivasan. “This suggests that PE firms recognise the strategic value of AI and cloud technologies and are making targeted investments in these areas.”
Notably, this academic study focuses on PE transactions completed from 2010 to 2021, so before the launch of OpenAI’s ChatGPT in November 2022 and the resultant surge in AI commercialisation. While there may be some concerns about an AI investment bubble in early-stage investing, a clear takeaway is that PE investors were early adopters of AI and may be well positioned to identify future technologies that could transform their portfolio companies.
In the Patria portfolio, managers have implemented AI strategies among companies spanning a range of industries, according to Vazirani. “I can’t see any company within our portfolio that’s not thinking of an AI strategy, because it is becoming existential,” he says.
AI presents a great opportunity, and you will see a variance in valuations between companies that have a credible AI strategy and those that don’t. Not having an AI strategy presents big risk for a company.
Haresh Vazirani
This has become more feasible as AI has developed and the technologies have become cheaper to deploy and more widely available. “During the past 18 months, there has been a remarkable democratisation of access to AI,” adds Mathers. “Midmarket businesses now have access to technology that would previously have been out of reach unless they had a huge R&D budget. This is a huge development and opportunity for mid-market companies and investors.”
For Baik, the impact of AI on the PE industry presents interesting opportunities for future research. “One area is to focus more on the specific impact of AI in PE and how it can shape value creation and PE fund reporting,” he says. “There are two phases to examine. First, how do PE funds incorporate AI strategy into their investment thesis, underwriting, and deal pricing when looking for new investments? Second, how do they use AI in existing portfolio companies to drive value creation?”
In Private Equity and Digital Transformation, Brian K. Baik and Suraj Srinivasan (Harvard Business School) and Wilbur X. Chen (Hong Kong University...