Artificial intelligence moves up the private funds agenda

AI technology is becoming a must-have, rather than a nice-to-have, in an increasingly competitive private funds market.

For private funds that want to differentiate themselves in a crowded and challenging market, embracing the opportunities offered by artificial intelligence adoption is front of mind. With the latest data showing fewer than one in 10 managers have so far implemented AI solutions at the fund level, those already investing see an opportunity to get a head start.

Motive Partners, a private equity firm with $4.8 billion under management and a focus on tech-enabled financial and business services companies, is one firm embracing AI adoption to transform the way it operates. Oren Michaely, the firm’s director of AI, says: “AI is rapidly moving from a nice-to-have to a must-have in the private equity industry, especially for firms who want to differentiate themselves.

“Given that AI is the hot topic, it’s understood that most firms are exploring ways to integrate it into their operations for cost reduction, revenue growth and enhanced efficiency. In the areas of risk management, data compilation and legal issues, AI can provide significant advantages, offering in-depth insights, automation and predictive capabilities.”

Over the summer, Private Funds CFO surveyed 101 senior executives at private fund management firms globally for its Private Fund Leaders Survey 2023. That research shows 14 percent of funds have so far implemented AI tools in their portfolio companies, but fewer than 10 percent have done so in regulatory compliance and risk management, investor relations and reporting, due diligence and data analysis, portfolio management and performance tracking, or in deal sourcing screening.

All these areas are ripe for AI integration, and four in 10 fund leaders say they are planning to adopt such technology in their portfolio management and performance tracking processes in the next year. Still, more than half have no plans for AI adoption in the next 12 months in any area, even though 63 percent agree that AI will be the most significant technology shaping businesses and industries over the next decade.

“AI is perceived as a pivotal tool to maintain competitiveness, especially in the current economic climate”

Davendra Patel
Alter Domus

At Motive Partners, AI is being incorporated into investment theses while AI threats, readiness and opportunities are being assessed across the portfolio. AI transformation is now at the heart of the firm’s value creation plans and is being used internally to increase productivity in areas from risk assessment to data transformation and trend analysis. “The current macroeconomic environment puts a lot of pressure on managers to streamline operational costs and improve overall efficiency,” says Michaely. “AI offers not only significant cost savings but also a productivity boost across various functions within a firm. From chatbots and semantic search to automated document and email generation, AI can handle a variety of tasks efficiently.”

These tasks can then be verified by humans, which means that by automating routine middle- and back-office tasks, human resources can be freed up to focus on more complex, value-adding activities.

TerraCotta Group, a California-­based real estate credit fund, is finding that AI is a powerful addition to its investment processes, according mto founder and CEO Tingting Zhang.

“If we were to make an investment in a shopping center, for example, as an expert human we would be very interested in the location of a property,” she says. “The expert human would go for a look around, see how many people were in the shops, how affluent the area looks and how busy the car park is. Now, using various machine-learning algorithms, we can get that data instantly from government sources, cellphone information, public sources and our own proprietary platform.”

There are still plenty of challenges to overcome, including reactions from LPs toward the use of AI. “Some are very curious, some are concerned about the black box taking over, and some who are better educated in quantitative mechanics want to bring in their quantitative teams to understand our various algorithms and what we do.”

But Zhang adds that attitudes are slowly changing on that front. “I do feel that at the end of a conversation, real estate investors and credit investors on the LP side have an ‘aha’ moment. We are not setting machines loose to do the investment work for us, but using them to look at locations through the same lens as an experienced real estate investor. We have never lost money on a single credit over our 20-year history and part of that is because of the ­human-machine collaboration.”

Getting priorities in order

In addition to the challenges associated with winning over LPs, the industry faces hurdles around sourcing the data that needs to sit at the heart of AI tools, as well issues surrounding data privacy, governance and ethics that come with handling large sets of data.

“Sharing proprietary data with shared models like ChatGPT can expose firms to the risk of information leakage, which is why many firms have blocked ChatGPT,” says Michaely. “The recent release of ChatGPT Enterprise, and Microsoft’s Azure OpenAI offerings, aim to address this concern.”

It can also be hard to know where to start. The Private Fund Leaders Survey shows due diligence and data analysis is the area of fund management where AI is expected to have the greatest impact over the next five years, followed by portfolio management and tracking.


Share of funds that have implemented AI tools in their portfolio companies. Source: Private Funds CFO’s Private Fund Leaders Survey 2023

Keith Miller, global head of private debt at Apex Group, says: “As an asset class, we are having a lot of conversations now about opportunities for AI around the review of underlying assets. That credit review process has always been incredibly manual but the big win for the asset class is the ability to review the underlying assets from a portfolio and risk monitoring perspective and conduct predictive modeling across assets to deliver scenario analysis.”

The ability for AI to read documents, extract valuable information and then compile and share that in an easily digestible format is not far off, but still needs some work, says Miller.

Bespoke vs off-the-shelf

For now, firms that can leverage the combination of skilled professionals alongside AI solutions look set to hold the competitive advantage of being early leaders in this space. However, managers have a decision to make when choosing between developing bespoke in-house solutions versus buying off-the-shelf products that are ready-made but that come with risks.

Motive Partners’ Michaely says: “While third-party solutions offer quick, powerful results, firms will have to balance those advantages against the lack of ownership, potential risks and reduced control that come with using an external solution.”

Nicole Weder is co-founder and chief product officer at Accelex, which provides data acquisition and analytics solutions for fund investors and asset servicers. The Accelex tech gives firms timely access to performance and transaction data from the funds they are invested in, in a clean and read-to-analyze format.

“The developments in AI are now so fast – the last year has been fairly exponential,” says Weder. “At the same time, regulatory pressure means we are moving towards investors wanting to have access to much more data, much more quickly and with more analytics around that. These tools enable that, but it is not simple and it is not something people are going to be buying off the shelf anytime soon.”

Among service providers, pressure is growing to harness the efficiency of AI tools to support back-office and middle-office functions. Alter Domus, for example, established its AI and automation team four years ago and has so far successfully deployed more than 40 bots, with a focus on optimizing processes, driving operational efficiency and improving quality.

Davendra Patel, head of AI and automation at Alter Domus, says: “AI is perceived as a pivotal tool to maintain competitiveness, especially in the current economic climate. It’s essential to balance AI’s potential with practicality, focusing on both immediate gains and long-term benefits.”

The firm has created its own version of ChatGPT and integrated generative AI to automate the classification, data extraction and summarization of documents from various sources, says Patel.

“Potential issues such as data breaches, biased decision-making, job displacement and system vulnerabilities are continuously monitored. We focus on regular reviews, audits and ethical considerations to ensure AI’s responsible and safe deployment.”

These are unchartered waters, but firms that are cognizant of AI’s trajectory within the private funds industry will set the benchmark for accelerated adoption in the future – and may reap the rewards that come with being an early mover.