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Scan the list of companies with the highest market capitalisations in the world and the value of artificial intelligence comes shining through. Three companies are now worth over $3 trillion: Microsoft, Nvidia and Apple. Together they are bigger than China’s entire stock market. All are making a big splash in the world of AI.

Deal origination and investment decisions

The applications are wide. A recent Accenture survey found almost two-thirds of global C-suite executives expect generative AI to revolutionise M&A deal processes more than other recent technological advancements, with 70% saying it will help them create higher alpha on their transactions. Pre-deal activities such as industry and company research, due diligence, valuation and deal structure, and synergy identification are expected to benefit most.

Common use cases include employing AI techniques and alternative data to analyse market trends, identify patterns in and between industries and geographies, and uncover opportunities amid the vast data universe that a human wouldn’t spot.

Boston Consulting Group points to the technology’s ability to accelerate investment research. For example, AI tools can support investment teams with thesis development by quickly gathering, synthesising and analysing internal and external data to summarise the market position of a private target and its competitive strengths. AI tools can also support a “red team” to brainstorm arguments challenging a deal.

Once targets are identified, AI can send highly bespoke emails detailing why a dialogue is in the companies’ best interest, observed Columbia Business School professor and former portfolio manager Michael Oliver Weinberg.

For businesses put up for sale, AI tools can assist managers with analysing Confidential Information Memorandum (CIM) documents that convey important information about the business – such as its operations, financial metrics and management team – to prospective buyers.

AI can subsequently draft a tailored investment report focused on the key issues, noted BCG, which estimated AI can shorten the time required for preparing investment committee memos by roughly 30%. Plus the tools can promote effective knowledge management and data sharing by organising reports, data sets and research developed by separate investment teams, breaking down silos and minimising redundant analyses.

“Such advancements enable investment teams to dedicate more time to analyzing synthesized content, thereby enhancing their decision-making process and increasing the success rate of deal bids and acquisitions,” stated BCG.

AI can then draft the acquisition documents based on its database and features deemed important by the PE firm ready for its lawyers’ ultimate review, Columbia’s Weinberg added.

Improve portfolio company performance

Post-acquisition, private market players can foster value creation in their portfolio companies by helping them use AI in turn, noted the BCG report. It highlighted the biotech sector, where leveraging AI for research could speed up the pace of product innovation.

In addition, AI tools can be used by private market firms to monitor portfolio companies’ activities and key performance indicators to drive improvements and track valuations, said Weinberg. AI can flag performance outliers and reach out to the portfolio company to address problems. If remedies are insufficient, issues can be escalated to humans at the PE firm. AI can also be used to determine an optimal time to divest from a company, and to draft the divestiture terms and contract for human review, he added.

Strengthen risk and compliance

More than nine in ten (92%) alternative fund managers, including private equity and hedge funds, are already using AI as part of their risk and compliance procedures, according to new research from regulation and compliance specialist Ocorian.

AI tools’ ability to process and analyse large datasets can assist with meeting reporting standards, evaluating market trends, portfolio risks and identifying potential compliance issues, said Ocorian’s Head of Systems, Regulatory & Compliance Hilton Goudriaan.

Top areas where fund managers think AI can be used to enhance risk and compliance procedures are transaction monitoring (28%), staff filings (21%), internal capital and liquidity monitoring (20%), and monitoring communications (19%).

The BCG report noted how AI can make risk management more efficient by analysing system logs and real-time data, identifying irregular activities and proactively flagging anomalies to the risk team. For example, AI can detect signs of market instability from news reports and respond before a portfolio value crosses the threshold that would have triggered action, it said.

In compliance, AI tools can “automate the creation and review of legal documents and contracts, quickly spotting and addressing potential issues,” it added.

AI-powered systems trained to understand the terminology of contracts and side letters will also allow fund managers to find the information they need across all their agreements in seconds, while powering dashboards to track, manage and comply with all the provisions offered, noted data provider Preqin.

Enhance investor relations and client servicing

AI could similarly transform PE/VC firms’ interactions with investors. The time-consuming task of completing due diligence questionnaires is one area, according to Preqin. It noted how teams previously had to manually pore over hundreds of historic documents to extract relevant information – an expensive, error-prone, tedious process. Today, AI programs can instantly query the data, speeding up processes while helping strengthen the relationship between GPs and LPs.

That ability to source information and pull insights from data lakes and document repositories can also be used to generate fundraising documents and investor presentations, track performance, value portfolios, detect trends and report on them.

And by enabling teams to focus on higher-value tasks that require human creativity and critical thinking, AI tools could ultimately enrich employee satisfaction and enhance the quality of service they provide to investors.

A win-win? Let’s hope so.

This content is for information purposes only. Treble Peak does not provide investment or tax advice, and information on this website should not be construed as such. Potential investors should seek specialist independent tax and financial advice before investing in any alternative investment.  Past performance is not a reliable guide to future returns. Your capital is at risk.

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