Private equity has shifted its stance from the days of taking over targets, with the goal of either flipping them to an interested acquirer or spinning them off into an initial public offering.

Buy-side competition is heating up. PE firms are now wielding artificial intelligence (AI) to discern which companies offer reliable, scalable, and secure products, as well as give them a first-to-market advantage.

According to analysts at Deloitte, generative artificial intelligence, or GenAI, can help identify the best opportunities.

“Product differentiators need to be fully understood to inform the deal thesis and value drivers,” said Nicolas Quintana da Silva, partner at Deloitte.

A More Systematic Approach To Investing

Thus, due diligence considerations need to take a systematic approach to “equip buyers and investors with a comprehensive understanding” of what to look for in an investment.

“From leveraging proprietary data sets to designing user-oriented workflows or an intuitive customer experience, understanding a target's ability to create customer ‘stickiness’ is essential when forecasting growth and market share against evolving competitors,” said Quintana da Silva.

Large language models, such as OpenAI‘s GPT system are more designed to handle conversational interactions, but are not currently efficient at managing workflows and rules-driven processes.

Quintana da Silva said: “Platforms that are able to effectively complement GenAI outputs with visual cues, citations, feedback mechanisms, and explanations of a model's decisions will build customer trust and may also realize rich usability data that can itself be inherently differentiated and valuable.”

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KKR And Blackstone Pioneers

Neil Sahota, an AI advisor to the U.N. and an IBM Master Inventor, wrote in Forbes earlier this month that PE firms such as KKR & Co (NYSE:KKR) and Blackstone Inc (NYSE:BX) had pioneered this industry revolution, “leveraging AI to analyze market trends, evaluate potential investments and enhance the decision-making process.”

Indeed, Swedish PE firm EQT Group leverages an AI tool called Motherbrain which helps it evaluate deal-making decisions.

“Motherbrain started in 2016 as a platform for EQT Ventures to be truly data-driven in finding the best tech start-ups to invest in. As thousands of new start-ups are founded every day, no human can rate them all.

“By visualizing and making the data accessible, building on a common corporate memory and collectively trained algorithms, Motherbrain creates structural competitive advantages enabling EQT to make faster and more substantiated decisions,” the company said.

Future Of AI Investment Strategies

Sahota is looking at a future where AI not only advises on potential investments, but can also forecast global economic shifts. “This would offer a level of insight previously unimaginable,” he said.

“In this envisioned future, AI becomes an integral part of every aspect of private equity. From initial deal sourcing to final exit strategies,” he added.

And with new use cases for AI developing rapidly, hundreds of start-up companies are likely to emerge that could, themselves, become targets for PE takeovers.

“They will be the firms that don’t just use AI but live and breathe it, making it a core part of their identity and strategy,” said Sahota.

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