Private Equity: Origination and AI
By Bernard Lam on the 15th December 2022Private Equity Artificial Intelligence
Artificial intelligence has the potential to revolutionise many industries, and private equity is no exception. By using AI, private equity firms can streamline the origination process and make more informed investment decisions. New technology can help identify investment opportunities that may have historically been overlooked, as well as evaluate the risks and rewards of each opportunity in a more efficient way. Here, we’ll explore how private equity firms are using AI for origination and how it’s transforming the industry.
A growing number of tech-savvy firms are exploring AI in deal origination and curation. Investments are being made in proprietary data technology to compete for deals, with EQT's Motherbrain being one example. Motherbrain uses algorithms to track "hundreds of millions of footprints" from people, companies, and their connections, helping teams identify investment opportunities earlier and build conviction faster. The goal of the platform was not to find the perfect investment automatically, but to help teams identify opportunities earlier and generate an edge to position EQT as a preferred buyer.
With data sets becoming increasingly accessible, AI can be deployed to accurately predict which companies will deliver returns. Industry, revenue growth and valuation over time can all be monitored pro-actively at scale, rather than on a company-by-company basis. Target companies can also be assessed with technology too. Natural Language Processing (NLP) can be deployed to analyse a target's website, job descriptions, headcount growth over time, and more. This allows for a rapid assessment of a company's performance as well as the identification of potential red flags.
Data availability has increased dramatically over the past decade, particularly in the past two years as companies have pivoted their business models online to weather the pandemic. This increase in data availability has led to the growing use of AI to find signals in the noise.
Adoption in private equity is still in its early stages. Despite this, a small but growing number of firms are pioneering the use of AI in deal origination and curation, leading the way for the rest of the industry. As AI continues to advance, it is important for private equity firms to explore and utilise its potential in order to remain competitive.