Private equity firms, which restructure companies by offshoring, making strategic acquisitions, and managing supply chain and costs, are increasingly focused on helping them use artificial intelligence to transform these businesses.
There is no shortage of AI products promising to revolutionize here or turbo-boost efficiency there, which can naturally translate into increased fund returns.
But beyond a handful of outliers that have integrated AI fully into their businesses, few companies have yet to realize the potential that AI has to transform their products and generate value for investors. Private equity may be able to help companies figure out where AI can be used to generate value at a time when every management team knows that they need an effective AI strategy to stay relevant, but doesn't always know how.
“Every software company knows they need to be building agents, every consumer company knows they need to be using AI to deliver the customer experience,” said Greg Emerson, head of technology investing at Boston Consulting Group, during a virtual live stream of the Milken Institute Global Conference this week. “But many of them are overwhelmed, they're lost. They maybe don't have the resources to do very heavy builds. And I think this is where a big component of the future of the private equity industry sits.”
For Emerson, helping to harness AI is the next opportunity. Firms can say to portfolio companies, “here's where we can take out costs, here's where we can drive revenue, here's where we can transform our value proposition to our customers.”
The launch of AI bot ChatGPT in November 2022, has already upended industries with efficiency drives and sweeping job changes, particularly junior positions. In three years, companies across the gamut have developed and launched AI capabilities of their own, with broad claims about their potential.
Examples include AI-powered refrigerators and smart bird feeders or Coca Cola’s Y3000 “AI co-created flavor,” which apparently used AI to mimic what a futuristic coke may taste like.
In some cases, these offerings look more like an attempt to stay current or get on the bandwagon — and could easily be labeled as “AI washing.”
But private equity is often proficient with technology that can be used to dramatically improve a product, according to Dipanjan Deb, CEO at Francisco Partners, a PE firm that focuses exclusively on technology companies.
“What is clear is that there's a great disruption, so you have to figure out if you are nimble and how to move towards that disruption,” he said. “Most of the AI portfolio that private equity is talking about today, candidly, is more marketing than substance. That's the reality of the situation: ‘We have our annual meeting and using AI we created lots of pretty slides about what we're doing with our portfolio.’ But it's definitely more marketing than reality today.”
He added that AI deployment needs to catch up with reality quickly, as PE firms look to sell their companies to mostly strategic buyers and other private equity firms, which need to see a way to increase the multiple or accelerate growth in the future. “And that's why we have to take advantage,” said Deb.
Other officials said AI also has a role to play in the actual art of investing, but the form of that has yet to fully materialize. AI can digest data and build applications in a way that will transform business models, but to do that there needs to be expertise at the helm.
Because the robot ship can’t steer itself, for now.
