By Bob Dryzgula, Harvest Exchange
One cannot go a day reading the news and not seeing the phrases “artificial intelligence” and “blockchain.” Once the domain of academics, coding enthusiasts and quantitative hedge funds, these technological advances have finally made their way into private equity.
According to a recent survey of PE investors by Coller Capital, two-thirds of LPs expect to see artificial-intelligence tools in use in private equity within five years. In an industry where trends grow slowly but persist for years, this data point is indicative of what’s to come.
The report does not elaborate on how the industry will use AI, but it can be applied in several areas of the PE ecosystem. Blockchain, the technology underlying cryptocurrencies and other record-keeping systems, has its own set of applications as well.
Portfolio Company Operations
For more than a decade general partners have touted “operational improvement” at portfolio companies as a way to create value. Operating partners often execute a 100-day playbook alongside management to streamline internal processes and create efficiencies. AI is the next tool at their disposal.
The PE industry invests across all sectors, from specialty-chemical manufacturers to enterprise-software providers. (In the case of software, PE-portfolio companies might very well be the ones developing AI protocols.) AI applications include using digital platforms to track customers’ interests and activities, helping to better anticipate their needs. And AI applies to, and has the potential to transform, every segment of the economy: industrial, professional/financial services, and consumer.
Closing a transaction is expensive, in both time and dollars. An investment team can collectively spend thousands of hours sourcing and structuring a deal, while intermediary, due diligence and legal fees can easily run into the millions of dollars. To make matters worse, the closing can be long delayed by data-room software that was not built with user experience and ease of navigation in mind.
With its unmatched data integrity, blockchain technology can make workflow more efficient among the multiple parties involved. And as more asset records move to blockchain-enabled record-keeping systems, the process of transferring ownership will be simpler and cheaper. This savings would ultimately benefit investors in the form of lower fees.
Fundraising and Investor Relations
More investment analysts, especially younger ones, at LP and consultant organizations are spending their workdays in the digital realm, both on desktops and mobile devices. Given the frequency with which they are bombarded by pitch decks and meeting requests, they would prefer to consume relevant content — public or confidential — on a single digital platform. Should this trend persist, managers will have built-in audiences at scale.
The traditionally analog process of fundraising, calling on institutional investors one by one, is time-consuming and expensive. For firms that do not have the luxury of being oversubscribed each time a new fund comes to market — and even those that do — a digital-assisted campaign powered by AI might prove a more efficient use of resources.
Large consumer and technology companies have used AI to track the interests of customers for years, and private equity firms are beginning to do so with their proprietary content.
Firms now consider any correspondence with a prospect or investor as content marketing, be it an email, a white paper for public consumption, or a proprietary report within a permission-only online portal.
By accessing data on what current and future LPs are reading and care about, a well-functioning AI platform enables business-development and investor-relations staffers to know their LP audiences better and serve them to the best of their ability.
It can be especially useful for firms that offer broader product platforms, revealing insights about groups of investors that might be interested in offerings outside the products in which they are invested.
PE at times has been accused of being a “me too” industry. When one pioneer succeeds in a particular sector, product offering or value-creation technique, others tend to follow. AI and blockchain are no different.
The most successful GPs tend to be the ones that are least complacent and embrace change, and they will be the first to adopt AI and blockchain for their benefit. Should the promised outperformance and cost savings materialize, expect their peers to adapt quickly.
Bob Dryzgula is chief marketing officer at Harvest Exchange, a Houston-based financial-technology company that leverages AI to help investors efficiently and securely access insights most relevant to them. Prior to Harvest, Bob was a managing director at a hedge fund, responsible for sales and marketing, and held sales, marketing and client-experience roles at a predecessor to AllianceBernstein. Reach him at [email protected], or +1 347-421-0878.