Daniel Fischer, Partner at Montagu recently spoke with FINANCE Magazin to discuss AI and the value-add in the private equity sector. Many private equity investors are exploring AI tools like ChatGPT for more efficient M&A processes. While ChatGPT claims it can assist in areas like deal sourcing, due diligence, and company valuations, the industry remains skeptical. Daniel sees potential in AI tools, especially in research and due diligence. Despite seeing value in ChatGPT and other AI tools like Microsoft’s Copilot, he notes concerns about accuracy and data confidentiality. Read the full interview below.
It is important to note that while generative AI models are capable of performing complex analysis and providing valuable insights, ultimately decision making should always be monitored and validated by experienced private equity professionals. Generative AI can serve as a tool to support the decision-making process, but human expertise and judgment remain essential.
More efficient M&A processes and better deals? That’s what every private equity investor dreams of AI tools like ChatGPT could fulfill the dream, but the industry is still largely critical of the tool.
Since late last year, it’s been hard to avoid the chatbot ChatGPT. People everywhere are experimenting with the generative AI tool and testing its limits. There are many areas of application in the corporate finance world, such as in controlling. Are there other possible applications, such as in the private equity business? FINANCE has asked around.
The first research station: ChatGPT itself. What does the chatbot answer when asked how it can make the private equity business more efficient? According to ChatGPT, there are five main ways to use the tool beneficially in PE deals: In deal sourcing, due diligence, company valuations, portfolio optimization, and forecasting and trend analysis.
Artificial intelligence promises to analyze large amounts of data and thus, for example, find potential investment targets or speed up due diligence. With the help of comparative data, ChatGPT also wants to be able to perform company valuations or analyze industry trends.
“Generative AI can help make private equity more efficient in several ways. Here are some possibilities:
1. Deal sourcing: Generative AI can be used to analyze large amounts of data and generate relevant information for deal sourcing. By searching company databases, news sources, and other information sources, AI can identify potential investment opportunities and build an efficient deal pipeline.
2. Due diligence: When conducting due diligence, generative AI models can help speed up and automate the process. AI can analyze large volumes of company documents, financial data, and other relevant information to uncover potential risks and opportunities. This allows private equity firms to save time and resources and make more informed investment decisions.
3. Valuation of companies: Generative AI can assist in business valuation by analyzing historical financial data, generating market forecasts, and identifying potential future value drivers. By leveraging machine-learning algorithms, AI can also help estimate enterprise value based on comparative data and transaction history.
4. Portfolio Optimization: Generative AI can help optimize private equity portfolios by simulating different scenarios and predicting potential impacts on portfolio performance. By considering factors such as diversification, risk-return profiles, and liquidity requirements, AI can help determine the optimal allocation of capital across different holdings.
5. Forecasting and trend analysis: Generative AI can analyze historical data and identify trends in specific industries or markets. This can help private equity firms become aware of new opportunities or risks early on and adjust their investment strategies accordingly.
It is important to note that while generative AI models are capable of performing complex analysis and providing valuable insights, ultimately decision-making should always be monitored and validated by experienced private equity professionals. Generative AI can serve as a tool to support the decision-making process, but human expertise and judgment remain essential.”
ChatGPT’s answers to the question of whether generative AI can make the private equity business more efficient.
Private equity advisors are using AI for ESG analysis
However, while ChatGPT itself promises it can be used, the tool is not yet being widely deployed. On the contrary, the majority of investment professionals surveyed by FINANCE are still very skeptical of generative AI tools.
One private equity fund, which does not wish to be named, reports that while it does not use artificial intelligence itself, consulting firms it hires do use it in the ESG analysis of portfolio companies. Based on data fed in, the machine has assisted in the ESG assessment of the companies. Beyond that, however, no financial investor would comment on the uses and risks of tools like ChatGPT when asked by FINANCE – with one exception.
Montagu is open to ChatGPT
Daniel Fischer, Partner at Montagu, finds generative AI and tools like ChatGPT interesting and helpful. He and his staff are already eagerly using the chatbot. “Our Associates in particular are testing ChatGPT for their research, checking theses and validating information,” Fischer reports.
He believes that ChatGPT can be used to quickly learn about a niche topic and get a good, initial basic understanding of a subject. “The bot can provide a rough overview of sectors or the interplay in an industry – similar to a map,” says the Montagu Partner.
In addition, Fischer sees other future uses for the tool that aligns with the chatbot’s response, “I can well imagine that we will eventually use artificial intelligence for target screening or working through and summarizing company profiles,” says the private equity investor. He also sees potential in due diligence: “Here, we are confronted with vast amounts of data, such as customer lists and financial ratios and their development. If a tool could pre-structure these in the future, that would be a real benefit.”
Fischer also has high hopes for Microsoft’s Copilot. The application wants to bring artificial intelligence to the entire Microsoft universe, from Word to Excel to PowerPoint. On its website, for example, it advertises that the tool can create meeting minutes or presentations based on notes from conversations, as well as automatically craft graphics from Excel spreadsheets. “It would be a dream if we could use AI to write and build memos or corporate presentations based on standardized templates,” the partner thinks.
Here’s what private equity needs to look for in ChatGPT
But the private equity man also sees risks in using ChatGPT. “You can’t rely on the results so far, they are still too often error-prone. And the time savings are not yet significant,” Fischer points out. He is also concerned about data and data security. On the one hand, so far only publicly available information is available until fall 2021. That means the information Montagu receives can also be accessed by a competitor. Also, the tool can’t make predictions because the data trove is time-limited.
On the other hand, there is no guarantee that ChatGPT handles confidential user data confidentially. This is because the operator OpenAI stores personal data on its servers so that the chatbot can use it for learning. And it cannot be ruled out that it will spit out the information elsewhere. In a highly confidential industry like the private equity market, this is an absolute no-go. However, anyone who still wants to use the tool can feed in confidential or personal and company-related data anonymously.
Fischer’s conclusion is positive despite the risks: “I believe that overall we will save so much time with the use of AI tools that we will be able to put more of our resources into the tasks that definitely require human interaction: Conducting expert interviews, networking, and making investment decisions.”
Altor invests in artificial intelligence
Midcap investor Altor is taking a slightly different AI approach: the Scandinavian firm identified artificial intelligence as an investment thesis and invested in Finnish company Silo AI about a year ago. Founded in 2017, the company aims to connect AI scientists and help companies develop AI solutions. More than 240 employees have implemented more than 200 AI projects since its founding.
“Artificial intelligence is an exciting field. One of the reasons we invested in Silo AI was to learn for ourselves about this portfolio company, what is happening and possible in the market,” reports Giovanna Maag, partner at Altor in Zurich. And there is another idea behind the investment: Altor not only wants to further develop Silo AI as an investment but also to leverage synergies in the portfolio. “Silo AI works with our investments to get AI solutions off the ground,” adds Altor partner Hajo Krösche.
Both Altor partners see great potential in generative AI and other solutions such as Large Language Models. But it will take “a little while” before these can be used on a large scale in the private equity business. Whether private equity will then be able to make even better deals remains to be seen. And until that happens, private equity- like all other industries – will have to be content with the fact that the information that tools like ChatGPT spit out should be treated with caution for the time being.
This is a translation of the article. Please find the original article here at FINANCE Magazin.
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