Transforming Private Equity : The Precision PE Approach

Private equity has recently entered a new phase in its evolution, comprised firstly of a step-change in the industry’s scale and maturity, with secondly an in-tandem shift in the economic backdrop. Long-established firms have evolved into multi-strategy asset managers or sector / geographic specialists, whilst new entrants, of which there are many, in combination with heightened market transparency and the efficiencies of a dedicated ecosystem of service providers, have increased the level of competition for assets.

Slowing growth, inflation shocks and higher (even if not high by historic standards) interest rates are also putting pressure on the returns at which historic investments were underwritten. This in turn has slowed levels of deal activity and comes against a backdrop of LPs looking to streamline their relationships, a trend which began even before many investors found themselves overallocated these past twelve months.

In a climate where competition for investment opportunities is increasingly fierce private equity firms must innovate to maintain their edge and to continue meeting the return expectations of their investors. In our view, they need to adopt an evolved approach to managing the investment lifecycle and portfolio value creation. This approach is enabled by the third significant force impacting private equity markets, that of technology and specifically the opportunities afforded by advanced data analytics centred on machine-learning and AI.

We call it “Precision PE”.

Author: Simon Williams, Founder at WovenLight

Precision PE : Harnessing Data and AI

Precision PE exploits two formidable tailwinds: the extraordinary abundance of data and the dramatic acceleration of AI technology to offer compelling, scalable advantage to private equity firms that embrace the technology, process and culture it implies.

Here’s how Precision PE enhances the investment process:

1. Diagnostics : Modern analytics techniques enable firms to quickly prioritise promising opportunities in a crowded and competitive market. In a time when good prospects are scarcer, the ability to utilise diverse data to more accurately pinpoint, validate and price potential investments is invaluable.
2. Performance : Active GPs have been tremendously successful in harvesting more traditional levers for portfolio value creation. To unlock incremental value, firms now need to explore further, deeper, and in more sophisticated fashion — exploiting the opportunities that machine-learning and AI offer in terms of efficiencies and effectiveness.

Likewise, the best management teams are increasingly looking for partners with deep technical expertise to help them navigate this journey; not only to improve operating performance but to build new future-resilience capabilities.

Data and AI : The New Frontier in Private Equity

The concept of mining large data sets for insights is not new. The term “big data” has been part of our lexicon since the 1990s. However, the current landscape is characterized by an unprecedented volume of data and the advanced technology required to parse through it.

In 2010, the global data volume was around 2 zettabytes. By 2020, it had surged to 64 zettabytes and is projected to exceed 180 zettabytes by 2025. This vast amount of data, much of which remains untapped, presents enormous potential for discovery and innovation.

AI-powered tools are now at the forefront of this data fuelled revolution offering competitive edge by automating processes, streamlining operations, and identifying patterns that human analysis may overlook.

At WovenLight, our founding team first deployed AI technology when enhancing the performance of Formula One racing cars. Since then, we have seen how it can transform the performance of companies across sectors — from optimising consumer pricing or reducing the time taken to run clinical trials, to understanding the variance in performance across sales teams and improving software engineering productivity.

Now, private equity is poised to benefit from this technological advancement.

Applying Precision PE Throughout the Investment Cycle

Precision PE impacts every stage of the investment cycle, from pre-acquisition identifying and vetting opportunities to post-acquisition enhancing value and preparing for exit:

1. Origination : Powerful AI-driven systems offer a game-changing advantage in this pursuit. Sifting through vast amounts of publicly available data, combined with existing high-quality paid sources, locally derived intelligence on a firm and even the proprietary deal archive gives radically new capabilities to unveil hidden patterns. This enables firms to prioritize the most promising investment prospects.
2. Due Diligence : A comprehensive, accurate and repeatable due diligence process is the foundation for informed investment decision-making. In this new world of prevalent, real-time, diverse data, diligence will be augmented by AI to systematically triangulate different perspectives and, critically, evolve as new evidence appears.
3. Ownership : The challenge for PE firms starts with acquisition. It’s been proven that active ownership is a key factor in unlocking the full potential of portfolio companies. However, the tools and techniques to execute against this premise have evolved. The leading firms of the future will achieve their competitive edge by setting up and understanding data feedback loops, at scale. They will use data to build competitive advantage through intelligence advantage (proprietary benchmarks and data acquisition), prompts (how they codify their domain expertise and frame into reusable templates), classification (how they organise, cluster and interrogate), and how they execute (repeatable methods, reduced cycle times and transparent performance measurement).
4. Exit Strategy : The exit phase ultimately crystallises the success of an investment. In a complex economic landscape further clouded by geopolitical tensions, AI tools analyze market trends and transaction comparables. They help identify suitable buyers, recommend optimal exit timings, and assist in preparing marketing materials, ensuring a favourable outcome for stakeholders. And to emphasise the ‘arms-race’ nature of this technology, our experience would support the value of the sell-side running the same diagnostics as the buy-side in order to identify, stress-test and validate the future potential of assets.

Precision PE doesn’t have to be radical and big-bang, as despite the world-changing AI hype, making small but impactful changes in data analysis, risk assessment, and decision-making processes can compound to deliver significant long-term returns. The key is building repeatable analytics that are sympathetic to the changing context of problems and the data which varies across companies.

Beyond the Hype : AI is now an essential tool

By harnessing the power of data, analytics, and AI, GPs — and their portfolio companies — will unlock new opportunities and differentiate themselves in a competitive market.

Embracing this evolution will position the private market ecosystem to continue to deliver superior outcomes for investors and stakeholders alike. At every stage of the investment cycle, firms can have a material impact on — and make a difference to — the performance trajectory of their portfolios. But if they are to achieve this, they must invest in talent, refine their processes, and foster a culture that embraces data and AI-driven innovation.

In other words, they must build a Precision PE business.