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AI takes over

New advances in artificial intelligence are creating a buzz in tech M&A in 2023, that if backed up by capital deployment could make up for the dip in private investment into the sector in 2022.

This article first appeared in the May 2023 Tech Buyouts Insights Report

New advances in artificial intelligence are creating a buzz in tech M&A in 2023, that if backed up by capital deployment could make up for the dip in private investment into the sector in 2022. 

Tech buyouts may be trickling to the surface in the first half of 2023, but technology in some segments is moving fast. So fast, that some private equity funds, 19% according to our survey, have admitted that their lack of knowledge could prove an initial challenge to doing deals (as seen previously in fig.1.2).

Private equity professionals in sectors such as telecommunications are reporting that the inability to quantify return on investment of AI trials is going to hold back AI adoption in their industry. This is particularly the case in large language models (LLMs) such as Microsoft-Open AI’s Chat GPT.

But at the same time, the buzz about generative AI, such as Chat GPT, is prompting others to venture forth – over one quarter of investors surveyed by Private Equity Wire said AI was the technology sector they were most positive on for opportunities in 2023, followed by healthcare, SaaS, climate and cyber.

By focus area, private investment in AI is already on a similar trend, with healthcare ($6.1 billion), fintech ($5.5 billion) and cybersecurity ($5.4 billion) among the top four areas by total investment, according to Stanford University’s annual AI Index Report (data management and cloud completes the top four at $5.9 billion, while energy-based cleantech AI investment is not as high as one might anticipate given zero carbon targets and the rise in oil prices due to the conflict in Ukraine, attracting less than $2.0 billion).

The report identifies 2022’s largest AI private investment event as the $2.5 billion spent on China-based unicorn and electrical vehicle manufacturer GAC Aion New Energy Automobile.

So, in this down cycle, is now the time to invest in more nascent technologies or tried and tested ones in, for example, industrial tech? Private Equity Wire put this question to EQT partner Arvindh Kumar.

“EQT has always invested in nascent technologies in our early-stage strategy, particularly through our Venture Capital fund,” says Kumar.

In November 2022, EQT held a final close on its EQT Ventures III fund at €1.1 billion of total commitments, to invest in European and North American early-stage tech startups. This makes it the largest fund of its kind targeting early-stage European startups. The firm is making it known that AI is definitely going to have a large influence in this latest fund, and across existing portfolio companies.

And the larger end of the deal market? “In our buyout fund, we have made several excellent investments in Industrial Tech, for example, AutoStore, an automated storage and retrieval system equipment manufacturer,” says Kumar. “Within buyouts, we continue to get deeper into food tech and sustainability tech and apply newer generative AI technologies to mature businesses to ensure that AI is a tailwind rather than a headwind.”

Growing pains

Certainly, headwinds for the industry at large remain. For example, there appears to be a disconnect between the countries that have invested the most into AI companies and the public opinion of the citizens of those nations (see boxout) – which may help explain the dip in AI led investment last year.

According to Stanford University’s report, global private investment in AI totalled $93.5 billion – more than double the 2020 total and the greatest year-over-year spike since 2014 when investment doubled. But in 2022, activity slowed, with global AI private investment accounting for $91.9 billion.

Of course, LLMs such as Chat GPT are industry-shifting, but like all new technology there are drawbacks – not least ChatGPT’s limit on using data beyond 2021.

NVIDIA claims its product NeMo is improving the data “time capsule” in today’s language models since it can include information beyond 2021 and augment client LLMs with proprietary data, enabling them to frequently update a model’s knowledge base without having to further train it or start from scratch.

Still, the onset of and a growing familiarity with ChatGPT and the likes will surely see uptake of AI technology (and investment) accelerate again – especially if those firms using new technologies show signs of an advantage.

Deal origination could be key. Some 37% investors surveyed by Private Equity Wire have integrated new software in the past 12 months to help (see fig. 3.2). Among the 27% of respondents to integrate AI, all were doing so to improve deal sourcing, 92% portfolio management, and 85% deal due diligence (see fig. 3.3).

At EQT, the firm’s hardest working team member is an app – Motherbrain – built in-house by a team of developers, engineers, and data scientists in 2016 to help EQT Ventures unearth tech start-ups to invest in.

EQT Ventures’ investment thesis has been proven with nine investments fully sourced by Motherbrain, says the firm on its site. These include Peakon, AnyDesk, CodeSandbox, Griffin, Handshake, WarDucks, Standard Cognition, Netlify and Anyfin.

“All of these are companies would not have been identified without Motherbrain,” EQT confirms.

Motherbrain is also using ChatGPT to help integrate language model-based applications in EQT portfolio companies, the company has recently reported in Business Insider.

More experimentation 

“We have indeed seen an uptick in the experimentation and application of ML and AI among our clients and it’s obviously more than just a passing trend,” says Edward Green, CEO of Equipped AI, a UK-based analytics solutions provider for alternative asset management firms.

Green was formerly Partner and Head of Asset Management at AnaCap Financial Partners before taking over the helm following its Equipped AI’s spinout from Anacap in 2021.

The company’s clients include Tristan Capital Partners, John Laing Group, Amitra Capital, Veld Capital, Quilam Capital, RCapital and Blazehill alongside AnaCap and the portfolio firms in which it currently invests.

“Machine learning and artificial intelligence present powerful opportunities to drive more sophisticated decision making, but at this stage do not substitute for ensuring that the core information flows within an organisation are delivering the right insights to key decision makers,” says Green.

“In our experience these are the key foundational steps required before embarking on a productive pilot exercise that deploys ML or AI techniques,” says Green.

Green says the spinout will keep investing in its technology, but when it comes to larger technology acquisitions, he adds, “they are not a priority now, though we will continue to remain open minded.”

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