June 13, 2024

The Art of Investment

Mastering the Stock Market Strategies

How GenAI is reshaping Private Equity investment strategy | EY

My recent blog on generative AI (GenAI) outlined how the technology is being adopted by the private equity (PE) sector and suggested that GenAI requires an approach that balances the immediate need for exploration (fast moves) with long-term strategic thinking (smart moves).

The EY organization’s recent CEO Outlook Pulse finds that 75% of PE-backed companies agree they must act now on GenAI to avoid giving competitors a strategic advantage. There’s no question that fast moves can help firms identify tactical opportunities, such as cost savings. Now it’s time to consider the smart moves: how can PE firms use GenAI to reshape and impact their investment strategy?

Balancing risks and rewards

When speaking with clients, I detect a growing sense of urgency to understand how GenAI is reshaping the investment landscape, and it is complex. It’s not only about what generative AI can do – the potential for enhancing value is enormous – but also the associated risks and challenges it creates within their operations and portfolio companies.

PE firms recognize the need for a strategy that serves two purposes: a safety net that defends investments against disruption and a plan that drives revenue, efficiency and overall portfolio performance.

I believe that this balanced approach is key. So, the conversations we’re having circle around three pivotal questions:

  • How will GenAI disrupt sectors, business models and functions?
  • What risks and opportunities do these disruptions create for new investments and existing portfolios?
  • How should firms pivot in response?

Fortifying defenses

Currently, we are working with funds to help them evaluate the potential impact of AI on their existing portfolio companies. Private equity firms excel at identifying investments with strong growth prospects and distinctive risk profiles but it’s becoming increasingly apparent that some long-established business models may struggle to remain relevant in the age of GenAI. Elsewhere, while opportunities for innovation may exist, they demand a deep understanding of the changing technology landscape to protect the original investments and maximize returns.

Consider the transportation industry: Companies in this domain could face significant changes driven by AI advancements in areas like route optimization, fleet management, and customer engagement. Manufacturers that have not modernized their processes are already facing the reality of increased inefficiency, rising costs, and the threat of becoming obsolete. In the healthcare sector, organizations that have yet to integrate emerging technologies to help them manage demand and patient care are at risk of falling behind.

In fortifying their portfolio against such disruptive forces, key questions firms can ask include:

  • What’s the perceived impact of AI on their sector in the immediate future, and how might this change in the medium to long term?
  • Which assets within the portfolio are most at risk of disruption from AI?
  • In what ways can AI be leveraged to enhance operational efficiency and strengthen the resilience of portfolio companies?


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