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  • Writer's pictureChelsea Wilkinson

GENERATING RETURNS - Generative AI's impact on key sectors and private equity investments

The technological landscape is rapidly changing. And investors’ attention with it.


Generative artificial intelligence (AI) is a transformative force, poised to revolutionise many industries. As this cutting-edge technology gains momentum, it's essential to explore which sectors are most likely to be impacted and how private equity investors can leverage these changes to their advantage.


Transforming Sectors:


1. Creative Industries: Generative AI is set to redefine creative sectors such as design, music, and art. With the ability to autonomously create compelling visuals, melodies, and artworks, artists will find new avenues for expression (and intellectual property protection). Design agencies and entertainment companies will also harness generative AI to streamline their creative processes and deliver captivating content.


2. Healthcare and Pharmaceuticals: In the healthcare realm, generative AI holds immense potential for drug discovery, disease prediction, and personalised medicine. By analysing vast datasets, algorithms can identify novel drug candidates and optimise treatment plans tailored to individual patients – revolutionising patient care, and research methodologies.


3. Manufacturing and Engineering: Manufacturing processes are ripe for disruption by generative AI. It can optimise product designs, minimise material waste, and enhance production efficiency. Engineers will collaborate with AI to create intricate and innovative products, driving advancements in aerospace, automotive, and other industries.


4. Financial Services: Generative AI's data analysis capabilities will reshape the financial landscape. Investment strategies, risk assessment, fraud detection, and customer service will all benefit from AI-powered insights, making financial institutions more agile and informed in their decision-making.


5. E-commerce: Among an ‘arsenal of ‘talents’, generative AI revolutionises customer and conversational experiences. Natural language generation (human-like text), contextual understanding, personalisation, 24/7 availability, multilingual support, and virtual shopping assistants are just some of the tasks radically improved. Dare I say, “The chatbot is dead. Long live the chatbot!”


Impact on Private Equity Investors:


Private equity investors are (generally) well-positioned to capitalise on the transformative potential of generative AI. Here's how:


1. Identifying Growth Opportunities: Investors can identify start-ups and companies at the forefront of generative AI development and adoption. Funding innovative ventures in AI-driven sectors can yield substantial returns as these technologies mature.


2. Enhancing Due Diligence: Generative AI can assist in analysing vast amounts of data, expediting due diligence processes. Investors can gain deeper insights into target companies' operations, markets, and growth potential, facilitating more informed investment decisions.


3. Operational Efficiency: Portfolio companies can leverage generative AI to streamline operations, optimise supply chains, and enhance customer experiences. Private equity firms can play a strategic role in building portfolio company awareness and adoption of AI solutions to drive efficiency and profitability.


4. Market Insights: AI-powered data analysis can uncover market trends and consumer preferences, informing investment strategies and portfolio diversification. While some private equity firms have already developed proven, in-house analysis solutions – think EQT’s Motherbrain – others are now rapidly seeking to build or buy solutions to unlock their significant data war chests.


5. AI-driven Valuations: AI adoption can significantly impact a portfolio company's valuation by enhancing operational efficiency, informed decision making, and innovation. AI-driven insights, automation, and predictive capabilities bolster growth potential, attract investors, and position the company as a technological leader, ultimately driving higher market value and investor confidence. Meaning, proactively preparing, and positioning a portfolio company’s data and AI assets is core to all exit-readiness processes.


6. AI & Data Due Diligence: As more companies adopt AI, prospective investors must interrogate data and AI assets as standard within their due diligence processes to stringently examine sellers’ claims. Data quality, representativeness, infrastructure, teams, algorithms, and training datasets (to name a few) need to be assessed for uniqueness, maturity, scalability, and commercial impact to underpin investor pricing confidence and future value-creation plans.


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In embracing generative AI's potential, private equity investors have the opportunity to shape the future of multiple industries, while generating substantial returns. As we stand at the cusp of AI-driven transformation, those who actively engage with these changes will undoubtedly lead the way into a new era of innovation and investing.


But buyers beware!


There are genuine risks of some AI applications being overhyped in the short and medium term. Investors must be careful to not misvalue AI by overestimating its immediate impact or underestimating implementation complexities, data quality issues, or regulatory and ethical hurdles.


Meaning, AI and data due diligence has never been more important. And AI and data value creation strategies never more urgent.

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