Forecasts suggest that market dynamics are changing and the private equity is poised to grow at an annualized growth rate of 12.8% has double of assets under management from $5.8 T in 2023 to $12 T by 2029, to achieve this objective, it will be necessary to fundamentally rethink the traditional economic model of private equity. The total value of private equity exits is on track to reach its lowest level in five yearsthis year, in an environment of lingering macroeconomic uncertainty, IPO market jitters and lingering geopolitical uncertainty.
Data and AI must be at the heart of this transformation. Although many private equity firms have managed to survive over the past few decades by deploying creative leverage and reengineering techniques to compensate for inefficiencies in their portfolio companies, this approach will not be enough to sustain growth on the market. current market. Today, as businesses become increasingly complex and technological improvements develop at a breakneck pace, portfolio company executives must not only identify the most innovative technology deployments in their portfolio companies; they need to start integrating this technology into their own operations. This is still a challenge for many companies. Actually, according to Deloittejust 10% of private equity firms had integrated AI into their operations by the end of 2023. They expect that by 2030, this number will increase to one in four firms.
The haves and have-nots of AI
The scenario is one in which a handful of leading private equity firms have recognized the intrinsic value of their own businesses by harnessing the power of data and AI to help them with everything from portfolios to discovery, deal sourcing and post-trade processes. However, most companies have not yet developed this level of digital maturity within their own operations, nor the means to implement data and AI-driven operational transformations within their portfolio companies. . Accenture reports that only 8% of mid-sized companies currently achieve optimal levels of operational excellence.. This represents enormous potential for outsized growth, but to unlock it, private equity firms must be prepared to overhaul existing systems for operational and digital value, including new and varied execution levers to accelerate execution times.
As the sell-side of the private equity market struggles to reach operational maturity, the buy-side is not immune to market pressures either. Private equity investors have become increasingly demanding because everyone wants to bet on the winning horse. Large, reputable companies like KKR, Carlyle and Blackstone, or mid-sized companies with a proven and deserved track record, grab the lion’s share of capital injection into the market and leave the rest of the companies to look for ways to stand out. With these dual pressure points, there is an opportunity to drive outsized operational efficiencies and value creation through data analytics and AI. Private equity firms must make long-term financial and organizational commitments to modernize the investment process.
Key Steps for Driving Private Equity Transformation
- Unlock business value: It is essential that private equity leaders place operational excellence as a cornerstone of value creation. Exponential value creation can only be achieved when operational performance improvement is integrated into every stage of the transaction cycle. From due diligence to exits, a tailored and integrated approach that unifies the right talent, necessary data and AI components is essential. By leveraging data-driven insights and AI-driven solutions, fund managers can unlock the hidden value potential of their portfolio companies. Fund managers should approach the pre-acquisition stages with this mentality, as data analysis applied to the due diligence and negotiation stages results in longer-term value creation. Post-acquisition, fund managers should proactively conduct ongoing, firm-wide assessments so that all potential value creation levers, including risk management, productivity, asset protection assets or output optimization, are optimized.
- Use the data: Once portfolio companies are acquired, private equity firms must be able to leverage their own data. Most portfolio companies, due to lack of scale, have fragmented data, which impacts their strategy and decision-making capabilities. Unifying data from many portfolio companies can become the keystone of continuous innovation, adaptation and strategic decision-making for private equity firms. Investing in a data-driven framework, supported by analytics and cloud-based infrastructure, can enable fund and portfolio company management teams to make the right decisions. Companies that succeed here will be able to create a system that provides strategic guidance to private equity firms and portfolio company teams to constantly reinvent their value creation agenda. Private equity firms that can effectively unify and leverage their data ecosystem will have a major advantage over those that do not and will be able to assess strategic market changes in real time.
- Infusing portfolio company data and AI strategy into fund operations: Another benefit of unifying disparate data systems is the private equity firm’s access to immense amounts of multi-applicable data that spans all industries and themes. Data and AI are stealth assets for private equity firms that enable them to build their own data feed ecosystem among all their acquired assets. Leveraged correctly, this represents a potential goldmine of information that can be leveraged for consultation, insights and market signals. By having ready access to diverse market know-how, private equity firms can significantly overcome barriers to entry when it comes to new markets or new investment themes. For example, powerful investment trends have been seen in recent years toward a combination of capabilities in healthcare, financial services, insurance technology and sports, which private equity firms can exploit through strategic investments. Most private equity firms are also keen to integrate AI into their operations, with the majority already running pilots and looking to expand their implementation. Analyzing market trends using data and identifying investment themes through innovative technologies such as large language models can reinvent the investment thesis for private equity firms.
- Faster turnaround times: Private equity firms need to turn around their investments faster. Across the sector, investment horizons for portfolio companies have shortened. Today’s dynamic and changing market requires a much more agile and rapid investment turnaround than traditionally seen in private equity. Private equity firms need to use the data analytics and AI capabilities they have to shorten their decision times.
- Strategic partnerships: The art of adaptability is finding the right resources to complement internal investment teams. Private equity firms also don’t need to adapt to the market on their own. All are increasingly leveraging their technology and operational infrastructure partners to accelerate time to value and meet the demands of an ever-changing market. Given their smaller scale operations, portfolio companies may struggle to hire the right resources or innovate through complex transformations. An ecosystem of strategic partnerships will enable private equity firms to create a ready-to-use, value-based model for any of their portfolio companies with exceptional speed.
With the market as competitive as it is and the technology roadmap constantly at a critical point of reinvention, it is no longer enough for private equity firms to leverage status quo methods to generate value. They must differentiate themselves by creating value for their portfolio companies through new and innovative approaches. Private equity firms poised to capitalize on early signs of recovery in the economy will see some of their most attractive long-term opportunities with high-quality assets in resilient or new sectors.
Learn how EXL can help private equity firms seek innovative solutions to maximize value creation, visit us here.
About the authors:
Vishal Chhibbar is Director of Growth and Strategy and Rakesh Sachdeva, Vice President and Global Head of Private Equity Practice and Alliances at EXL, a leading data analytics and digital operations and solutions company.
