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Artificial Intelligence: A Value Driver for Private Equity

This article was published in Capital & Corporate magazine in December, 2024.

Private equity is undergoing a radical transformation due to artificial intelligence (“AI”), which has emerged as a critical engine for creating value within portfolio companies. This technological revolution is enabling private equity firms to move beyond traditional strategies focused on cost optimisation and revenue growth, steering them towards a more holistic model where technology becomes an undeniable competitive advantage.

Some 59% of firms consider AI to be a key factor in value creation, surpassing other traditional drivers, according to our report AI Radar for Private Equity 2024.¹ This reflects a profound shift in how firms perceive technology: no longer as just an enabler, but as a fundamental component in transforming every aspect of the value chain. From product development to logistics optimisation and customer service, AI offers multidimensional capabilities that improve operational efficiency whilst also unlocking new business opportunities.

The impact of AI in private equity is particularly evident in the asset transaction stage. Using advanced algorithms, firms can present financial data with greater clarity, generate more accurate forecasts and identify risks that previously have gone unnoticed. These capabilities have significantly increased asset valuations, maximising returns for investors. Yet achieving this level of sophistication comes with challenges.

To implement an effective AI strategy, private equity firms must overcome substantial hurdles, such as a lack of specialised talent and the need for robust technological infrastructures. 36% of companies with AI strategies do not include key performance indicators (“KPIs”), a striking finding from our report that highlights their limited ability to measure the real impact of their initiatives and adjust them as needed. Here lies one of the sector’s main opportunities: to ensure that AI translates into tangible value by developing measurable strategies aligned with business objectives.

A number of successful cases demonstrate AI’s transformative potential in private equity. For instance, a U.S. energy firm used AI-driven strategies to identify over 120 investment opportunities, achieving a streamlined process that realised significant cost reductions.² Meanwhile, a global media and technology platform tripled its addressable market and increased its revenues by 30% through innovative digital solutions.³ As these examples show, AI not only drives economic value but also positions companies for innovation and for sustainable and competitive growth.

Beyond portfolio companies, AI is helping redefine the internal operations of private equity firms themselves, particularly in the deal origination cycle. From due diligence to risk assessment and strategic decision-making, AI algorithms are optimising every stage of a transaction, freeing up valuable resources and allowing teams to focus on high-value-added activities. Relying on technology to this high level also entails risks that must be carefully managed – common concerns include data privacy, result accuracy and cybersecurity risks. Nevertheless, with many ways to mitigate these threats only 11% of firms consider them a priority.

Firms that fail to integrate AI across their value chain will inevitably fall behind. Adopting this technology is no longer optional, especially given that 75% of private equity firms are investing or planning to invest in AI within the next 12 months, according to our report. This level of commitment underscores the urgency for firms to develop clear strategies and measurable approaches to maximise AI’s impact.

Private equity stands at a historic crossroads. Embracing AI with a strategic vision not only ensures relevance in a global market but also positions firms to lead in an increasingly technological – and ever more competitive – environment. Which firms will lead this transformation, and which will lag behind? The answer hinges on their ability to address technological challenges, implement effective strategies and seize the opportunities that AI offers.

1: Survey to more than 200 senior Private Equity executives in North America, EMEA and APAC regions, conducted between July 25 and August 27, 2024.

2: https://www.fticonsulting.com/en/canada/insights/case-studies/enabling-ai-top-us-energy-company

3: https://www.fticonsulting.com/insights/case-studies/creating-ai-opportunities-world-leading-media-technology-platform