The Slow Burn of AI in Private Equity: Big Payoffs Ahead

Jan 9, 2024

2 min

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The Slow Burn of AI in Private Equity: Big Payoffs Ahead

What the Next 5 Years of AI-Driven Change in Private Markets will look like.

Hype around AI, particularly since the release of ChatGPT in November 2022, is not new. Yet fewer than 10% of American businesses utilize AI. History tells us this should not come as a surprise. It took decades for firms to adopt electricity. The world wide web became open to the public in 1991, but it took 19 years for two-thirds of American firms to implement a website. Businesses are typically slow to adapt to new technologies, and financial executives are cautious.

While AI will not transform the financial landscape overnight, private equity firms are leveraging it more effectively than average businesses. Currently, nearly 20% of portfolio companies recognize value from generative AI, while another 32% are testing or developing AI capabilities. Meanwhile, 21% have identified use cases that remain untested, and 29% have not identified cases.

Expectations for the impact of AI are expected to increase over time:

In the one-year time frame, 65% expect no or minimal value, reflecting the necessary development curve.
Within three years, 30% expect significant value, and only 7% expect no or minimal value added.
In 5 years, 57% of investors surveyed expect significant value from generative AI, 43% expect moderate value, and zero respondents expect no value.

Summary:

Generative AI is gradually redefining private equity operations, delivering early gains despite challenges like infrastructure and data integrity. As firms continue to adapt, investor confidence is growing, with the majority of firms expecting significant value within five years—positioning private equity to unlock the full value that generative AI has to offer.

SOURCES

Bain & Company, Nov 2024 - Creating Value with AI: The Race Is On in Private Equity

The Economist, Sept 2024 - The breakthrough AI needs

The Economist, Nov 2024 - There will be no immediate productivity boost from AI

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