This week, private equity investing and AI.

AI will change the world, but how will it change M&A? I want to focus on AI’s impact on M&A in this newsletter. I am not an expert on either M&A or AI, but I want to learn about both topics and how they intersect. I thought there might be others in my situation (or people who are experts in one field or the other) who would find information on M&A and AI helpful in their careers, so I created this newsletter to track and share what I learn.

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AI’s Impact on Private Equity

I have focused on AI’s impact on the legal side of M&A, so for the last couple of weeks, I have looked into how AI will affect private equity firms.

Here is a PE Hub article about private equity firms’ use of AI. It sounds like what I have discussed on here about AI’s effect on law—AI will help PE firms quickly evaluate tons of information efficiently. The article focuses on how AI will help identify potential targets. Specifically, how the search functions of AI will enhance PE firms’ ability to quickly identify relevant data in the sea of information provided to PE firms during the investment process. This function will “make a two-hour question into a two-and-a-half minute question.”

We have talked previously about the search functions of AI. I think the “advanced ctrl-f” feature of AI is understated. PE Hub’s article alludes to the fact that instead of requiring an exact textual match (like “ctrl-f”), AI allows a searcher to use natural language, and in some cases questions and answers, to dissect a document (or many documents!). The article mentions that PE professionals currently use AI search to quickly find the most important information from the slide decks they receive, giving PE firms who leverage AI a clear advantage over those who do not.

Something that M&A lawyers may find interesting is that legal work is one of the areas that private equity firms have identified as a use case for AI. The article refers to AI’s application to legal work as “low-hanging fruit.” As we have discussed here many times, AI is a great tool, but it is not (yet) a replacement for human judgment and expertise.

When Should AI be Used by PE Professionals?

PE firms of all sizes appear to be searching for use cases for AI inside their firms and in their portfolio companies.

I recently listened to an episode of The Private Equity Funcast, a podcast hosted by a middle-market PE firm, ParkerGale Capital. The episode focused on AI and PE. The hosts made several good points about how PE firms could leverage AI. Most importantly, the hosts emphasized the need to determine appropriate times to use AI.

Inappropriate uses for AI in PE, according to the hosts, were high-level tasks requiring intuition and judgment. For example, making a final investment decision is an inappropriate use of AI. That task (presumably) requires human judgment based on experience and a “gut feeling” about the business. 

One appropriate use of AI identified by the hosts was deal sourcing. As I have previously discussed, AI is good at sifting through tons of information, like the slide decks provided to PE firms by potential targets. The AI functions we have discussed here will make tasks like identifying a target and due diligence far quicker than they currently are.

The hosts compared the current state of AI to an intern. An intern typically has a basic understanding of what is happening in their job, but requires the supervision of a more experienced professional to check the intern’s work. I think this is a great comparison that applies to any application of AI. The old adage “trust but verify” certainly applies to AI.

Regarding large PE firms’ use of AI, I watched the video below of Harvey Schwartz, CEO of Carlyle. Schwartz states that Carlyle is actively looking for use cases for AI both internally and at Carlyle’s portfolio companies. He mentions some cases where AI has already improved a portfolio company’s performance.

I think this brings up an important point—PE firms with advanced AI capabilities can “link” portfolio companies to AI and improve their performance. In the next couple of years, as the adoption of AI occurs, I bet PE firms will identify targets who do not use AI and evaluate their business and the firm’s investment based on what improvements AI will bring to the company. At least for a few years, AI will be an easy operational improvement for AI-fluent PE firms to implement in their portfolios. Relatedly, PE firms will probably need to hire people who know about AI and who can find creative use cases for AI in any given business.

AI will impact PE, so everyone involved in the space needs to become familiar with the technology!

About me

My name is Parker Lawter, and I am a law student pursuing a career as an M&A lawyer. I am in my last semester of law school, and with some extra time on my hands, I decided to create this newsletter. I hope it is informative and helpful to anyone who reads it! I am not an expert at either M&A or AI, but I am actively pursuing knowledge in both areas, and this newsletter is a part of that pursuit. I hope you’ll join me!

Follow me on LinkedIn: www.linkedin.com/in/parker-w-lawter-58a6a41b

All views expressed are my own!

Photo of Parker Lawter Parker Lawter

My name is Parker Lawter, and I am a law student pursuing a career as an M&A lawyer. I am in my last semester of law school, and with some extra time on my hands, I decided to create this blog. I hope…

My name is Parker Lawter, and I am a law student pursuing a career as an M&A lawyer. I am in my last semester of law school, and with some extra time on my hands, I decided to create this blog. I hope it is informative and helpful to anyone who reads it! I am not an expert at either M&A or AI, but I am actively pursuing knowledge in both areas, and this newsletter is a part of that pursuit. I hope you’ll join me!