AI Takes Center-Stage for Value Creation in Private Equity Firms
An FTI Consulting Report
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Insights Across Dealmaking, Operations and Revenue Growth
How the strategic deployment of AI is transforming value creation for portfolio companies
AI Is Now a Driving Factor in Value Creation
Several levers influence value creation for portfolio companies (“PortCos”), but AI will loom large as one of the most prominent ones. The majority of firms surveyed expect AI to drive a significant share of total value relative to other levers driving value creation. While AI is important on both sides of deal execution, it has an outsized impact on the sell-side, as it can drive up the valuation of PortCos.
Insights Across Dealmaking, Operations and Revenue Growth
PE respondents expect the largest value creation among PortCos to come from improvement to the business model, implying an expectation of wide-ranging transformative effects rather than incremental gains to margin through revenue growth or cost reduction. This illustrates a key shift in thinking around value creation, from a focus on cost or revenue metrics to a realization that AI could have a multidimensional impact on the business if properly applied.
Consistent with this expectation, the functional areas in which AI is seen as most impactful on value creation are those with a more holistic and strategic focus — precisely those areas with the potential to have a more transformative impact. These areas include improved or enhanced decision making capabilities, as well as customer-facing functions. Though at a slightly lower potential, respondents indicate that PE expects AI to improve service and product offerings more than operations and back-office functions.
55%
More informed decision-making
52%
Customer care and engagement
40%
Strategic product development and core competency
36%
Functional efficiency including logistics, manufacturing and transportation
31%
Back-office efficiencies across functions
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
Areas of High Potential for AI-Driven Value
Share of respondents who indicated AI has a high potential to drive value creation in the next 18-36 months. Respondents were asked to assess each functional area for potential impact.
Believe AI will drive significant share of value in their PortCos
59%
AI is expected to drive significant value creation relative to other levers
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
Major share
Moderate share
Minor share
None
FTI Consulting’s survey, AI Radar for Private Equity, explores the transformative impact PE executives are seeing from AI on value creation, dealmaking and strategy. This survey of PE executives is the first in a series of in-depth analyses that will delve into transformative applications of AI and sector-specific advancements, providing actionable insights for PE firms.
Top AI Driven Value Creation Levers in PortCos
Improvement to the business model
Customer acquisition
Cost reduction
65%
50%
46%
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
Importance of AI in Sell-Side and Buy-Side Diligence
Sell-side
% Very/Somewhat Important
Buy-side
57%
16%
26%
32%
38%
6%
24%
83%
56%
Very Important
Somewhat Important
Not Too Important
Not At All Important
AI Investment Has Already Begun and Early Evidence of Value Creation Is Tangible
The majority of PEs are already investing in AI or are getting ready to invest in the near-midterm, and most are anticipating seeing value in the next 18 months.
are leveraging AI for value creation in their PortCos or plan to in the next 12 months
75%
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
Currently Leveraging
Plan to Leverage (Next 12 Months)
Plan to Leverage (No Timeline)
No Plans to Leverage
of those currently leveraging AI are either already seeing its benefits or expect to see value in the next 18 months
87%
Already Seeing Value
Expect Value within 18 Months
Expect Value in 18-36 Months
Expect Value in 3+ years
While a majority of respondents expect AI initiatives to be funded by the individual PortCo, nearly 4 in 10 are considering funding AI through some level of centralization, either utilizing a fund from across their PortCos or a center of excellence at the PE firm. Centralizing resources at the PE portfolio level could help to ameliorate some of the more common challenges around strategy development and talent recruitment.
Interest and investment in AI is already widespread, with approximately half of PE respondents saying they are currently leveraging AI in their PortCos. Furthermore, one quarter say they are planning to use AI in their PortCos within the next 12 months. AI is still in the early stages and more use case validation is needed. However, current investment has momentum, and intendend investment levels are high as early signs of material value are visible.
With the recent rapid advancement in AI and high expectations for future progress, value creation won’t lag far behind. The majority of PE respondents are either already seeing the value of AI, or expect to see value within the next 18 months. AI adoption is expected to have greater impact on revenue growth compared to cost savings, although positive impact is expected on both.
Revenue Improvement
24%
4%
45%
24%
3%
Cost Savings
13%
3%
30%
46%
9%
Degree of Impact
20%+
10% - <20%
5% - <10%
<5%
No Impact
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
Estimated Financial Impact From AI Implementation
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Finding the Right Talent and Developing the Right Strategy Are Key Challenges
A key hurdle for PortCo operators is creating the appropriate AI strategy and securing the necessary talent to effectively implement it.
Despite the high interest in AI and available investment funds, PE firms may not be adequately prepared for implementing AI, with less than half having a formal strategy or roadmap currently in place. Even among those with a formal strategy, more than one-third don’t have specific mechanics to track progress.
A majority of PE firms point to developing a strategy and finding the right talent as the biggest challenges in AI value creation implementation. Centralizing sources of funding for AI could be one path towards addressing some of the common challenges as executives could execute investment decisions at the firm level. As with any other investment, getting buy-in and having a strong business case with a higher ROI is important. However, given the general consensus around the transformative potential of AI, justification may prove easier than for other initiatives.
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
Develop Strategy
Talent
Time Needed
Buy-in from Leadership
Investment Justification
61%
57%
41%
36%
31%
AI Implementation Challenges
Respondents were asked to select up to three of their biggest challenges.
Currently Have AI Strategy
AI Strategy or Transformation Roadmap
Planning to Build Out AI Strategy Internally
Looking for Partner on AI Strategy
Not Planning
38%
32%
19%
11%
have no specific milestones or KPIs for measuring and managing the AI impact on value creation
Of those who currently have an AI strategy...
36%
Strategy
In-house
Strategic Advisory Firm
Management Consultancy
Boutique Advisory Firm
System Implementors
Architecture
Proof of Concept/Build
Integrate and Operate
58%
38%
36%
34%
44%
17%
32%
37%
24%
44%
40%
44%
30%
29%
33%
25%
11%
26%
29%
28%
AI Partner Ecosystem
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
Many respondents are formulating their AI strategy initially with in-house teams while bringing in external expertise as they move along the AI maturity curve of AI deployment. Two-thirds report seeking external support with proof-of-concepts, developing target state enterprise and data architecture, or integrating AI into their operations. When they seek external support, the preferred model is largely with strategy and management consulting firms. This suggests that the endeavor is currently considered to be relatively complex vs. a more steady-state scaling exercise that is typically accomplished through system implementors.
Navigating AI Value Chain Complexities
Few PE firms see the risks associated with AI as concerning but remain bullish about the industry’s ability to surmount them. A significant majority of respondents perceive AI risk as low or moderate, likely because the associated risks are clear and well-defined, while unforeseen risks have yet to emerge. The most commonly cited risks include accuracy of results and trust/privacy in the context of AI. Cyber risks are also a concern, but less top-of-mind compared to accuracy and trust.
73%
ACCURACY OF RESULTS
66%
Trust or privacy in AI
52%
Cyber risks or bad actors
associate AI with high risk
Only 11%
Perceived AI Level of Risk
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
High Risk
Moderate Risk
Low Risk
No Risk
Top 3 Risk Areas
Survey respondents were asked to select their top three responses, the percentages represent their top choices
PE Recognizes AI Risks, Yet Considers Them Manageable
There are risks within AI, but PE firms are already evaluating the potential consequences and consider these risks low or moderate at best.
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
AI Is Improving Efficiencies Across the Deal Lifecycle
AI’s impact is not limited to PortCos. All but a small minority of PE respondents are leveraging AI internally in the deal lifecycle. The most common use cases include data analysis/summarization and document scanning, but PE firms are also expanding the use of AI for additional use cases such as investor profile summarization, market scanning and trends and investment monitoring, among others.
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
Data analysis and summarization
Document scanning, processing
Investor profile summarization
Market scanning
Trends and investment monitoring
Financial Due Diligence (“FDD”)
Benchmarking and performance management
Commercial Due Diligence (“CDD”)
Fraud and anomaly detection
68%
61%
41%
40%
31%
29%
29%
20%
17%
AI-Leveraged Activities
Respondents were asked to select multiple activities.
To continue the conversation on how PE firms can unlock AI’s full potential, we encourage you to attend our upcoming webinar and read our case studies. This survey is brought to you by a team of AI and digital experts who partner with Private Equity firms to build value in their PortCos.
Our experts facilitate value creation by helping clients transform core business operations through digital, data and AI strategies that help drive revenue growth, reduce costs, enable business model innovation and mitigate risks.
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Insights Across Dealmaking, Operations and Revenue Growth
CASE STUDY
Creating AI Opportunities for a World-Leading Media and Technology Platform
CASE STUDY
Enabling AI at a Top U.S. Energy Company
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Sumeet Gupta
Senior Managing Director
Digital and AI Practice Lead
sumeet.gupta@fticonsulting.com
Jiva J. Jagtap
Senior Managing Director
Global Leader Private Equity
jiva.jagtap@fticonsulting.com
Authors
Methodology
This research was conducted online by FTI Consulting’s Digital & Insights team, among n=208 respondents working at private equity firms and meeting the following requirements:
– Full-time employees in senior positions including managing partners, operating partners, principals and vice presidents.
– Involved in investment and operation decision-making for their firm
– Works at a firm in either the North America, Europe or Asia Pacific regions, with an average AUM totaling $22.3 billion
All research was conducted between the dates of July 25th to August 27th 2024. Per the standard convention of rounding,
some totals may not add up to 100%.
For any questions relating to the survey methodology, please contact
Julija.Simionenko-Kovacs@fticonsulting.com
AI Value Creation
Investment in AI
Key Challenges
AI In the Deal Lifecycle
AI Risks
Unlocking AI Value
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Revenue growth
46%
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* Defined as either a major or moderate share of value
Interest and investment in AI is already widespread, with approximately half of PE respondents saying they are currently leveraging AI in their PortCos. Furthermore, one quarter say they are planning to use AI in their PortCos within the next 12 months. AI is still in the early stages and more use case validation is needed. However, current investment has momentum, and intendend investment levels are high as early signs of material value are visible.
With the recent rapid advancement in AI and high expectations for future progress, value creation won’t lag far behind. The majority of PE respondents are either already seeing the value of AI, or expect to see value within the next 18 months. AI adoption is expected to have greater impact on revenue growth compared to cost savings, although positive impact is expected on both.
Source: FTI Consulting Survey: AI Radar for Private Equity 2024.
AI Value Creation
Investment in AI
Key Challenges
AI In the Deal Lifecycle
AI Risks
Unlocking AI Value
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AI Value Creation
Investment in AI
Key Challenges
AI In the Deal Lifecycle
AI
Risks
Unlocking
AI Value