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Generative Artificial Intelligence: Unlocking Transformative Opportunities

Generative artificial intelligence (AI) has emerged as a game-changing technology, promising to disrupt numerous industries and business functions. As ChatGPT demonstrated its remarkable capabilities in late 2022, it became evident that generative AI could significantly impact various sectors, including private equity.

• Generative AI acts as a critical reasoning engine, enabling open-ended conversations with customers, producing rich marketing content, and providing deeper insights from vast data stores.
• The potential impact of generative AI spans multiple occupations and industries, transforming how work is done.

Private Equity's Multi-Faceted Approach to Generative AI

Private equity firms are mobilizing their efforts around generative AI in three key areas:

• Within the Portfolio: Firms are assessing the potential impacts and opportunities across their portfolio companies, linking generative AI initiatives to strategic objectives and executing rapid test-and-learn efforts.
• In Due Diligence: Leading teams are developing scorecards to assess generative AI threats and opportunities during due diligence. They are also leveraging AI tools to speed up and enhance the underwriting process.
• At the Firm Level: Generative AI offers ways to streamline back-office functions and dramatically expand the scope of information available for investment decisions, making institutional knowledge instantly accessible.

Drawing Value from Generative AI in the Portfolio

To unlock value from generative AI in the portfolio, firms must link the technology to pragmatic business objectives and prioritize initiatives with the highest potential impact.

• Firms are conducting portfolio scans to identify companies facing short-term disruption, those likely to transform over time, and those unlikely to be significantly impacted by generative AI.
• The case study of Multiversity Group, an Italian online educator, highlights how an "MVP accelerator" was established to develop and test generative AI applications, leading to initiatives like using AI to answer routine student questions and freeing up professors' time.
• By going through this exercise across their portfolios, private equity firms are gaining a master class in generative AI, enabling them to respond effectively to deployment opportunities.

Enhancing Due Diligence with Generative AI

Generative AI is becoming increasingly critical in bolstering due diligence processes, with firms developing scorecards to assess threats, opportunities, and organizational readiness.

• Deal teams are conducting fast analyses to determine if generative AI is likely to impact target companies, positively or negatively, in the years ahead.
• Generative AI tools can scan vast amounts of data, such as customer reviews and market participant interviews, providing structured insights quickly.
• Firms are building live models during due diligence to "prove disruption" by testing the performance of generative AI solutions against proprietary tools.

Sharpening Fund Insights with Machine Learning

Generative AI holds the potential to transform fund operations and supercharge investment professionals across the full value-creation cycle.

• Firms are exploring initiatives to make investment professionals more productive by automating busywork and expanding access to information and insights.
• Generative AI tools can scan massive data pools for insights based on a fund's preferred screening criteria, streamlining deal sourcing and evaluation processes.
• Chatbots can leverage a firm's institutional knowledge and crawl through internal and external data sources, providing deeper insights into target companies and market conditions.

Getting Started with Generative AI in Private Equity

To effectively leverage generative AI in private equity, firms should prioritize the following steps:

• Scan the existing portfolio to identify companies facing potential disruption or opportunities from generative AI.
• Link AI initiatives to clear strategic objectives that can boost performance, such as customer satisfaction, revenue generation, or cost reduction.
• Implement effective change management strategies to ensure frontline employee adoption and success.
• Integrate generative AI into sourcing and due diligence processes, leveraging AI-enabled tools to gain competitive advantages.
• Explore how generative AI can transform internal operations by providing investment professionals with powerful data-driven insights.

Embracing Generative AI's Disruptive Potential

While generative AI presents both challenges and opportunities, it is imperative for private equity firms to act now and harness its potential. By focusing on initiatives with real impact, firms can turn these disruptive technologies to their advantage, driving better returns and gaining a competitive edge in the industry.