Insights 2024: The advent of AI

CFOs are exploring how artificial intelligence could transform their asset classes

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The hype around artificial intelligence is steadily building as businesses grapple with how the disruptive technology could transform their industry, and the private markets are no exception. Half of the CFOs canvassed in the Private Funds CFO Insights Survey 2024, conducted in partnership with Aztec Group, are actively evaluating the potential use cases for AI, while a further 11 percent are already implementing AI within their workflows and processes.

Meanwhile, of the 37 percent of respondents that said they are yet to review the potential benefits or risks of AI, or else are currently avoiding the use of AI altogether, the most common reason given for these attitudes was a need to better understand how AI will fit into their workflows.

The need to understand outputs and see practical use cases were also cited as reasons for not engaging with AI, together with security risks and a general mistrust associated with the nascency of the technology.

The potential for AI to transform elements of the private equity lifecycle is far-reaching. The use of AI is being trialed in industry mapping and deal sourcing, matching potential targets with a private equity firm’s specific criteria. It can also be used to keep track of companies on a firm’s watch list, using natural language processing to identify key events and shifts in customer or market sentiment.

AI can also play a role in due diligence, where it can be used to embrace a diverse set of data sources to uncover hidden insights and potential red flags, as well as to support portfolio management by enabling strategic decision-making based on data-driven insights.

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However, those that have already adopted AI and machine-learning technology are seeing mixed results. Almost two-thirds of respondents using AI to support deal sourcing describe its effectiveness as low, while more than half report similar findings for deal due diligence, risk management and investor relations. Portfolio monitoring appears to be providing the best results so far, with 60 percent describing its effectiveness as moderate or high.

But despite growing pains, many across the market think that embracing AI will prove critical to remaining competitive in the future. “I truly believe that technology is advancing so rapidly that whether you are lower mid-market, mid-market or bulge bracket, pretty soon, if you don’t have some form of data analytics and/or AI, you are going to find yourself behind,” says Jason Snider, CFO at Gauge Capital.

In terms of identifying which functions are closest to being disrupted, Snider points to both sourcing and diligence, but even accounting could benefit from AI adoption.

“There is also significant potential for AI in portfolio monitoring. There is so much data that exists within our portfolio companies today that it is not feasible for humans to analyze it all, looking for anomalies, trying to manage inventories or working capital. If you can put AI tools on top of that data, those processes can be transformed.”

Indirect intel

An intermediary approach to AI could involve accessing the technology through third parties. One mid-market CFO explains that, for now at least, his firm is accessing AI indirectly.

“We are currently putting in an accounts payable system that uses AI to retrieve invoices, for example. Similarly, we are moving to outsourced NDAs. Five years ago, there would have been armies of attorneys putting those together. Now, 80 percent of that is done via AI, with attorneys simply reviewing.”

The Riverside Company’s CFO, Béla Schwartz, is meanwhile optimistic about the potential of AI. “We have so many products and agreements, it would be fantastic if AI could help us understand where inconsistencies exist from fund to fund. It would be great if AI could help tailor side letters, for example.

“I am curious about finding ways to use AI to better manage LP/GP negotiations altogether.

“But I think the biggest impact from AI will be felt on the deal side, analyzing companies and looking for patterns that cannot be seen with the naked eye.”