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October 29, 2024

GenAI revolution in private equity

 

 

 

 

Akshat Ruia
Global Head of Buy-side Practice
Crisil Global Research & Risk Solutions

 

 

 

 

Sheetal Aggarwal
Associate Director
Crisil Global Research & Risk Solutions

 

 

 

 

Unnati Sharma
Senior Research Analyst
Crisil Global Research & Risk Solution

 

Transforming businesses with GenAI

 

The private equity (PE) space is poised for rapid transformation as firms increasingly adopt generative artificial intelligence (GenAI).

In the past few years, geopolitical uncertainties and market volatility have hindered fundraising and exits in the PE space. Notably, global deal exits plummeted 38% on-year in 2022 and 37% in 2023, intensifying competition and limiting opportunities.

Besides, widening valuation gaps and heightened risks have prompted a shift in PE strategies. 

To thrive in such a setting, firms should enhance tracking of key performance indicators, standardise reporting, accelerate growth of portfolio companies and optimise costs. GenAI can assist with all of these.

Additionally, GenAI can help optimise deal sourcing, due diligence, portfolio management and illiquid asset valuation to boost investment returns. That said, PE firms must develop a strategic roadmap to address potential obstacles stemming from GenAI adoption and integration.

GenAI adoption accelerates

 

Big or small, most firms are investing in GenAI. According to the recent EY CEO Outlook Pulse Survey, 74% of PE-backed portfolio companies are already using GenAI in their operational processes or piloting potential solutions.

They are either building in-house AI solutions and data science teams to provide expertise across their portfolios or forming partnerships with software providers and GenAI start-ups to access cutting-edge technology and generate near-term value.

GenAI adoption accelerates

A recent KPMG survey of 225 senior business leaders found that 50% of organisations are purchasing or leasing GenAI from vendors, 29% are using a combination of building, buying and partnering, and only 12% are developing GenAI solutions in-house.


PE-backed investments in GenAI on the rise

 

The transformative nature of GenAI has led to a continued rise in demand for the technology. According to a Techaisle survey, GenAI has become a priority for 53% of small businesses, up from 41% in 2023. Among mid-market firms, this figure has reached 87%.

PE firms, too, have realised the benefits of GenAI. In a recent Gartner survey4 of 822 business leaders, respondents reported an average of 15.8% revenue increase, 15.2% cost savings and 22.6% productivity improvement using GenAI.

According to S&P Global Market Intelligence, PE/VC-backed investments in GenAI surged to $2.18 billion in 2023, more than double the previous year’s figure. Of this, the United States and Canada accounted for a substantial ~45%.

PE-backed investments in GenAI on the rise

GenAI can transform the investment lifecycle

 

GenAI has the potential to streamline the investment process of PE firms, providing accurate insights on market trends and investment opportunities.
 

GenAI can transform the investment lifecycle

 

GenAI can transform the PE lifecycle, from raising capital and screening targets - where it can analyse thousands of potential targets and shortlist them, reducing time taken by a whopping 50-60% (Accenture research) - to making investments, valuing deals, creating value and strategising exits.

PE firms are integrating GenAI to improve efficiency by harnessing large datasets, identifying patterns, and generating actionable insights with speed and accuracy, thereby expediting investment decision-making. GenAI can help optimise traditional value-creation levers, fuelling rapid revenue growth and EBITDA expansion.

This enables PE firms to enhance their portfolio returns by reducing costs, increasing productivity and improving the bottom line. A Deloitte survey of 2,835 global representatives found that 56% use GenAI to enhance efficiency and productivity, 35% to reduce costs, and 29% to drive innovation and growth.
 

Challenges to GenAI adoption

 

GenAI is a transformative technology, but its adoption is fraught with risks and operational hurdles. As adoption increases, the financial burden of developing and deploying GenAI models is coming into sharper focus. Companies are yet to fully test and experience GenAI’s capabilities.

Recent Gartner research suggests that up to 30% of GenAI projects may be abandoned due to challenges such as data quality and privacy issues, high cost, integration complexities, and ethical considerations.

Challenges to GenAI adoption

Strategic approach to unlock GenAI's full potential

 

Integrating GenAI into traditional businesses is a challenging, yet manageable, endeavour. It requires an effective strategy that considers cultural, process-related and financial factors.

Strategic approach to unlock GenAI's full potential

Conclusion

 

By leveraging advanced data analytics, GenAI can enhance decision-making processes, boost operational efficiencies and uncover lucrative investment opportunities, ultimately catalysing value creation for PE firms.

Embracing GenAI has become a strategic imperative for maintaining competitiveness. That said, the associated risks must not be overlooked.

To mitigate these risks, PE firms must evaluate how GenAI can disrupt their business models and functions, considering factors such as timelines, costs, value generation and implementation effectiveness. This assessment will determine which entities are likely to emerge as leaders in technological evolution and which may face challenges in adapting to these advancements. 

To navigate the complex terrain of GenAI transformation, PE firms and their portfolio companies can collaborate with trusted partners or consultancy firms.

Crisil empowers asset management firms to unlock GenAI’s full potential, including transforming traditional processes and enhancing deal sourcing, due diligence, portfolio management, illiquid asset valuation, cost savings and risk management.

Our expertise in harnessing GenAI enhances AI accuracy. This enables clients to make informed investment decisions, ensure compliance and fulfil regulatory reporting requirements, thereby staying ahead in a rapidly evolving market.


Sources

 

  • EY CEO Outlook Pulse Survey
  • KPMG GenAI 2024 Survey
  • Techaisle Survey
  • Gartner Research July 2024
  • Deloitte Survey 2024
  • Accenture - Unleashing the Power of Generative AI for PE
  • S&P Global Market Intelligence