Beyond the status quo: Harnessing data and AI to drive transformational value in private equity

Forecasts have suggested that market dynamics are changing and that the private equity is poised to expand at an annualized growth rate of 12.8% to double in AUM from $5.8T in 2023 to $12T by 2029, achieving that goal will require a fundamental re-think of the traditional private equity business model. The total value of private equity exits is on track to hit its lowest level in five years, this year, amid an environment of persistent macroeconomic uncertainty, skittishness in the IPO market, and continued geopolitical uncertainty. 

Data and AI need to be at the core of this transformation. While many private equity firms have managed to survive through the past several decades by deploying creative financial leveraging and reengineering techniques to offset inefficiencies in their portfolio companies, that approach will not be enough to sustain growth in the current marketplace. Today, as businesses grow increasingly complex and technological improvements develop at breakneck pace, portfolio company management must not only identify the most novel deployments of tech in their portfolio companies; they must start incorporating that tech into their own operations. That’s still a stretch for many firms. In fact, according to Deloitte, just 10% of private equity firms had integrated AI into their operations by the end of 2023. They expect that by 2030, this number will jump to one in every four firms.

AI Haves and Have-Nots

The scenario is one in which a handful of leading private equity firms have recognized the intrinsic value of their own businesses in tapping the power of data and AI to assist with everything from portfolio valuations to discovery to deal sourcing to post-deal processes. Most firms, however, have not yet developed this level of digital maturity within their own operations, or the wherewithal 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. That represents a massive potential for outsized growth, but in order to unlock it, private equity firms must be prepared to overhaul legacy systems by opting for operational and digital value including new and varied execution levers to yield quicker turnaround.

While the sell-side of the private equity market struggles to reach operational maturity, the buy-side isn’t insulated from market pressures either. Private equity investors have become increasingly discerning as everyone wants to bet on the winning horse. Large and reputed firms like KKR, Carlyle, and Blackstone, or the mid-sized firms with proven and earned pedigree are grabbing the lion’s share of the capital infusion in the market and leaving the rest of the firms looking for ways to set themselves apart. With these dual pressure points, there is an opportunity to generate outsized operational efficiency and value creation driven by data analytics and AI. Private equity firms must make long-term financial and organizational commitments to modernize the investment process.

Key Steps to Drive Private Equity Transformation

1. Unlocking Operational Value: It is vital that private equity leaders place operational excellence as the cornerstone of value creation. Exponential value creation can only be achieved when operational performance improvement is infused at every stage of the deal cycle. From due diligence to exits, a bespoke and integrated approach that unifies the correct talent, necessary data, and AI components is essential. By harnessing data-driven insights and AI-powered solutions, fund managers can unlock the hidden value potential in their portfolio companies. Fund managers must approach pre-acquisition stages with this mentality as data analytics applied at the due diligence and negotiation stages results in the most long-term value creation. Post-acquisition, fund managers must proactively conduct continuous and enterprise-wide assessments so that all potential top and bottom-line value creation levers—including risk management, productivity, asset protection, or exit optimization—are optimized.

• Harnessing Data: Once the portfolio companies are acquired, private equity firms must be able to harness their own data. Most portfolio companies, due to lack of scale, have fragmented data which impacts their strategy and decision-making abilities. Unifying the data from many portfolio companies can become the linchpin to 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 empower the fund and portfolio company management teams to make the right decisions. Firms that succeed here, will be able to create a system that provides the strategic guidance to both private equity firms and the portfolio company teams to constantly reinvent their value creation agenda. Private equity firms that can effectively unify and harness their data ecosystem will have a major advantage over those that don’t and will be able to real-time evaluate strategic shifts in the market.

• Infusing Data and AI Strategy from Portfolio Companies to Fund Operations: Another advantage to unifying disparate data systems is the private equity firm’s access to immense amounts of cross-applicable data that spans industries and themes. Data and AI are private equity firms’ stealth assets to set up their own ecosystem of dataflow among all their acquired assets. Harnessed correctly, this represents a potential goldmine of information that can be mined for consultation, insights, and market signals. With ready access to diverse market know-how, private equity firms can substantially bridge the barriers to entry when it comes to new markets or investment themes. For example, there have been powerful investment trends toward blending capabilities across healthcare, financial services, insurance technology, and sports in recent years which private equity firms can tap through strategic investments. Most private equity firms are also eager to infuse AI into their operations, with a majority already running pilot projects and looking to scale implementation. Analyzing market trends through data and identifying investment themes through innovative technologies like large language models can reimagine the investment thesis for private equity firms.

• Faster Turnarounds: Private equity firms need to turn around their investments quicker. Across the industry, the investment horizons of portfolio companies have shortened. Today’s dynamic and changing market requires a far more agile and quicker turnaround on investments than traditionally seen in private equity. Private equity firms need to utilize the data analytics and AI capabilities available to them to move their decision timeframes to shorter cycles.

• Strategic Partnerships: The art of adaptability is in finding the right resources to supplement the in-house investment teams. Private equity firms also need not adapt to the market on their own. All are increasingly leveraging technology and operational infrastructure partners to help accelerate time to value and cater to the demands of the ever-changing marketplace. With their smaller scale of operations, portfolio companies can find it challenging to hire the right resources or innovate through complex transformations. A strategic partnership ecosystem will allow private equity firms to create a ready 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 tipping point of reinvention, it is no longer enough for private equity firms to leverage the status quo methods for generating value. They must differentiate themselves by creating value for their portfolio companies through new and innovative approaches. The private equity firms that will be prepared to capitalize on the first signs of green shoots in the economy will see some of their most compelling 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 chief growth and strategy officer 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.