Digitisation is reshaping the world as we know it. In this digital age, the sheer amount of data being created is growing exponentially. You may have heard people say that “data is the new oil” or something to that effect—it powers almost everything we do. Indeed, by 2025, there will be 175 zettabytes of data in the global datasphere. Data is invaluable in today’s world, but we must interpret it correctly to ensure it has true value. That is where artificial intelligence (AI) enters the picture.
AI has applications in many industries. For example, AI is used in healthcare to mine data to identify patterns. This allows for more accurate diagnosis and treatment of thousands of medical conditions. In retail and e-commerce, AI recommends products to consumers by finding patterns in their online behaviour. In the banking and financial services sector, AI is replacing humans in processing loan applications and sifting through data to identify investment opportunities. AI has significantly impacted almost all industries, but some are lagging behind.
AI In Private Equity
Private equity has been slow to embrace AI. Many firms use basic data analytics to inform decision-making, but opinion and qualitative assessment still seem to rule the roost in some organisations. One study suggests that 74 per cent of private market firms have yet to review AI adoption. However, as time goes on, more firms are coming to realise AI’s potential.
Currently, the most frequently cited inhibitor to AI adoption is the lack of standardised data at scale. Each deal in private equity is different, and every set of financials needs robust questioning that relies on judgement. Unfortunately, judgement isn’t something that AI has mastered just yet.
However, this doesn’t mean that AI and private equity are incompatible; far from it. AI will improve data collection and, eventually, may lead to the standardisation of metrics. Some in the industry have called for the creation of anonymised databases across portfolios, including the relevant metrics, which will help firms identify early industry trends and conduct market analysis.
One of the most significant barriers to AI adoption in private equity is a cultural one. Within many private equity firms, the emphasis continues to be placed on personal judgements rather than robust data. Until the culture of private equity changes, many firms will not create in-house data teams to utilise AI to the firm’s advantage.
AI and Due Diligence
Due diligence is a crucial aspect of M&A and other major transactions. When multiple parties are working towards an outcome, all involved must obtain a full assessment of the asset they are hoping to acquire, including potential opportunities and associated risks—that is where due diligence comes in. Conducting in-depth due diligence without the help of AI would be an incredibly time-consuming task.
Today, thousands of datasets are available, and leaving the analysis to an individual or a group of people would mean that deals would take a long time to complete. Human analysis alone could lead to costly errors and avoidable data gaps. On top of this, the longer a deal takes to complete, the higher the risk involved. To summarise, AI supports better decision-making, increased productivity and, by extension, more profit. Consequently, private equity firms are looking to incorporate AI into their due diligence.
Onefourzero and AI
Using AI in due diligence is in the hands of a few innovative and data-driven companies. Onefourzero is one of them. We have observed that over the last few years, more firms have opened up to using AI in due diligence.
We use AI to clean and combine data from multiple sources, providing us with larger, robust data sets that organisations can rely on. Within these robust datasets, we use algorithms to spot correlations that are undetectable by humans. Put simply, AI produces and assesses insights that the human brain cannot. For example, using AI, we are able to see whether changes in pricing drive changes in customer conversations online.
Online conversations are assessed and quantified using Natural Language Processing (NLP), which allows computers to understand text and spoken words in the same way a human can, but in a fraction of the time. The combination of robust data and NLP means that AI can provide us with insights that a human simply wouldn’t be able to do.
However, it’s important to note that consultants still play a key role in the due diligence process. We’re not at the stage where AI can do it all just yet. While AI is excellent at gathering gigabytes of useful data in a short amount of time, consultants help to transform data into a digestible output, be it a dashboard or a report.
Private equity firms are fundamentally built on people and their relationships with others in the industry, so it’s unlikely that AI will replace all personal interactions any time soon. Indeed, we may see a hands-off investment cycle similar to algorithmic trading at some stage. Nevertheless, the implications of AI are positive for private equity. Leveraging AI should be seen as an opportunity to grow and improve rather than a threat that firms should avoid at all costs. Private equity firms that fail to realise the incredible potential of AI will soon find themselves lagging behind their competitors.
Palladium Group have acquired international digital and commercial M&A consulting firm onefourzero, bringing together two of the most progressive consulting firms in the industry. Palladium is pleased to announce the launch of its AI Impact Assessment service. This innovative 2-stage process is designed to help private equity clients comprehensively assess the potential value and impact of artificial intelligence (AI) on their current and future investments. For more information on the AI Impact Assessment service, please don’t hesitate to contact Palladium.