LLMs and LPs
Lopez-de-Silanes believes that investors themselves could benefit from using artificial intelligence (AI)-powered tools to analyse qualitative information as a way to improve the accuracy of their performance forecasts beyond manager selection. “This kind of approach could help them to reach more informed decisions around re-ups, the valuation of secondaries transactions, and portfolio management more generally,” he says.
“Given these findings, placing more structured emphasis on the narrative tone is advisable as part of a holistic due diligence framework,” says Scopelliti. “Analysing the narrative can provide early insights and complement quantitative data, especially in opaque private markets.”
Investors process stories more effectively than raw data, which makes tone a powerful signal.
David Scopelliti, Mercer
He adds that LLMs and natural language processing are promising tools for a range of applications, including: systematically analysing large volumes of qualitative data; detecting sentiment, tone shifts and linguistic cues at scale; flagging inconsistencies between the narrative and quantitative metrics; and benchmarking the tone against historical and peer data. However, Scopelliti stresses: “LLM outputs should augment – not replace – expert judgment.”
Czermin agrees. “I have no doubt that qualitative information is critical to due diligence, so I can theoretically envisage using LLMs as a basis for further discussion with the manager,” he says. “I can’t imagine letting an AI tool decide if a fund is good or not. Real life is more complicated than that. But I can see it as a supporting instrument.”
However, he raises the question of what happens when GPs realise that LPs are using LLMs. “Will they adapt their reporting accordingly? This could become circular,” he says.
Lopez-de-Silanes believes that the message for GPs is clear. “LPs are only going to become more sophisticated in their awareness of potential manipulations as they start to use these tools to help them decipher the qualitative information they are being given,” he says. “It is therefore time for GPs to level up or lose out. They need to be more consistent in the financial metrics that they provide.”
