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Increased use of AI in PE will cause an industry shakeout, says new research

The increased usage of Artificial Intelligence (AI) in Private Equity (PE) and Venture Capital (VC) will boost the sector’s operational efficiency greatly and transform the ways in which partners perform their work, according to a new study. However, the paper’s author, Professor Thomas Åstebro of HEC Paris Business School, says it will also lead to a technological arms race and cause an eventual ‘industry shakeout’.

Titled ‘An Inside Peek at AI Use in Private Equity’, Åstebro’s new study looks at the growing use of AI by PE/VC firms and how it will impact firms’ performance, and the overall future of the sector. The study, just published in The Journal of Financial Data Science, finds that an increased use of AI will have a substantial impact on the sector both positively and negatively. For example, the paper points out beneficial changes such as reducing travel and meetings, increasing long-distance deals, diversifying investment portfolios, and encouraging the launch of new PE/VC firms. Together, these efficiencies will completely re-design PE/VC firms’ workflows and deal-making processes. However, the paper also points out that the increased use of AI systems will likely eliminate junior-level tasks, and cause loss of jobs.

One of the companies analysed for the paper is Jolt Capital, a company which has seen a quick rise in operational efficiency after the introduction of AI in its decision-making processes. At Jolt Capital, the AI-based decision support system learns to imitate the preferences and decisions of experienced partners in the form of “likes” and distributes that experience to help all those involved at the firm. 

Jean Schmitt, the firm’s CEO explains: “The learning part is critical, because after a while, the system can tell me what I like and what I don’t like. A junior isn’t filtering these deals; my digital self is.”

Åstebro believes that AI adoption by established PE/VC firms is will accelerate, first by incorporating AI piecemeal into various tasks, and later completely disrupting old ways of thinking and working. According to Åstebro: “We will continue to see the entry of new firms that specialise in using AI. PE/VC firms are always trying to beat one another to the punch. Predictably, they will increasingly do so, driven by a technological arms race.” However, he points out that the expansion of new firms based on AI also will have clear negative competitive effects.

As most industries that experience a radical business-transforming innovation such as this one demonstrates, Åstebro argues that: “The increased competition focused on new technology will eventually squeeze out new entrants and accelerate the exit of those that cannot remain at the technological frontier. This dynamic typically leads to industry shakeouts.”

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