Private equity comes to grips with AI
Survey insights: AI adoption in private equity
More than 40 per cent of private equity fund general partners (PE GPs) surveyed by Pictet Alternative Advisors1 now have an AI strategy for their own business – although surprisingly, those focused on technology investments are, by and large, the ones without such a strategy.
Overall, they see data and output quality as the biggest barrier to adopting AI, with privacy and cybersecurity issues also posing significant challenges. They are least concerned about finding staff with the skills to implement AI systems or the cost of adopting AI.
Privacy “is a subject that companies care about a lot, while unsolved this will be a barrier. Though for many use cases there are solutions that entirely eliminate this as a barrier,” noted one PE GP.
As for data quality, “even when current data/output quality is not satisfactory, models are constantly improving and for most applications are constantly improving in quality.” Cost is also expected to fall: “the trend so far has been that as newer models are released, the older models drop in price exponentially.”
Nonetheless, nearly all PE GPs recognize AI’s importance – just over a quarter think it is overhyped. Only a tenth are not using it or prohibiting it. Some two-thirds are exploring the uses or have got as far as testing AI applications, while the remainder are already integrating AI into at least two or three of their processes, such as customer engagement, data analysis or IT coding. More than half are offering AI expertise or consulting to their portfolio companies.
One firm – albeit an exception – has a detailed strategy. It said that it “has an established generative AI framework, both in terms of the firm’s existing investments where the focus is on building leadership within the portfolio companies with a dedicated Gen AI product strategy and adopting new tools, and in terms of new deployment, with the Gen AI framework helping to test the risks and opportunities associated with Gen AI and ultimately leading to investment in companies that are expected to benefit from AI tailwinds.”
Figure 1 - Hurdling
Expected barriers to adoption of AI, range 1=none to 10=critical, average response
Source: Pictet Alternative Advisors, Pictet Asset Management. Survey of private equity general partners conducted by Pictet Alternative Advisors between October and November 2024. 22 PE funds surveyed, response rate for individual questions ranges from 14 to 16.
Turning to their portfolio companies, only around 15 per cent of PE GPs reported that more than a quarter of their portfolio companies do not use or prohibit the use of AI. Around two-thirds of PE GPs reported that more than a quarter of their portfolio companies were testing or piloting AI use. And nearly 40 per cent of PE GPs reported that more than a quarter of their portfolio companies used AI in at least two to three processes.
“We believe all [portfolio companies] will eventually incorporate AI,” according to one PE GP. Indeed, firms are already starting to reap benefits. More than 60 per cent of respondents reported some revenue increase at their portfolio companies due to AI, with one reporting that more than 25 per cent of their revenue growth was down to AI.
Almost all PE GPs expect technology companies to benefit most from AI over the coming 24 months, while fewer see significant benefits for firms in the consumer, industrial, financial and health sectors.
“Portfolio companies are engaging heavily in this,” said one PE GP, “even if it’s to rule AI out as a threat/opportunity. We provide expertise ourselves, as well as relying on third parties with particular use case expertise.”
In order of ranking, the corporate functions that PE GPs see benefiting most from the adoption of AI are: AI coding; business process automation, such as improving efficiency of software, and data analysis (equal); customer engagement/experience; content generation, editing and translating; sales and marketing, supply chain and logistics, and digital strategy (equal); and, finally legal. None cited AI as being among the most beneficial to cybersecurity or human resources.
Figure 2 - AI taking over?
Degree to which AI is seen as relevant for business activities, range 1=none to 10=critical, average response
Source: Pictet Alternative Advisors, Pictet Asset Management. Survey of private equity general partners conducted by Pictet Alternative Assets between October and November 2024. 22 PE funds surveyed, response rate for individual questions ranges from 14 to 16.
Fund GPs were divided on whether the adoption of AI would allow their portfolio companies to reduce the size of their workforce or cause no change. Nearly a third of respondents thought it would result in smaller workforces, with the rest expecting no change.
“For the most part the workforce will stay the same, but increase in productivity,” said one fund GP. “For some companies the workforce will be reduced.”
Another added that “given portfolio growth, we don’t expect to reduce the workforce but to drive productivity and reduce the need for future hires.”
None of the fund GPs thought that AI would take their own job.
Despite AI’s high energy consumption, three-quarters of respondents thought it was environmentally justified.
“Generating a single image using ChatGPT costs almost as much energy as charging a smartphone,” acknowledged one respondent. “Models need to become smaller, more task-specific and be used more intelligently. Energy production needs to be greener, both energy storage and transmission need to be optimized to minimize losses. All these things are possible, and the usage of AI will likely drive the economic argument for their development. Therefore, while current energy usage is not environmentally justified, the pressures to enable AI usage may ultimately lead to green energy breakthroughs that all industries benefit from.”
