6 Ways AI Will Impact Private Equity Firms’ Human Capital Needs

December 4, 2024 – Incorporating generative AI tools into private businesses and public sector organizations could increase global productivity by 1.5 percentage points over the next decade, according to Goldman Sachs Research. This would lead to a seven percent – or almost $7 trillion – increase in global GDP. McKinsey says generative AI is “poised to unleash the next wave of productivity” and the market seems to agree. In 2022, the global gen AI market was estimated at $10.79 billion. This is projected to grow to around $118.06 billion by 2032 at a compound annual growth rate (CAGR) of 27.02 percent. While venture capital (VC) firms are keen to invest in generative AI startups that show promise, private equity firms are typically leveraging AI in their own operations and those of their portfolio companies, according to a recent report from global leadership advisory and executive search firm Sheffield Haworth.

Venture capital firms increased their positions in gen AI from $1.7 billion across 64 deals in 2019 to $17.4 billion across 170 deals between Q1 and Q3 2023, according to CB Insights. For private equity companies this is less about investment in AI startups. Rather, the evidence suggests that PE firms are increasingly leveraging AI to drive operational efficiencies, improve deal sourcing, and enhance investment decision-making, with the trail-blazers here being Blackrock and KKR.

“That said, while some PE firms are racing ahead, others are struggling to catch up,” the Sheffield Haworth report said. “Some will inevitably lose out to nimbler competition such as Blackrock and KKR who invested early in AI and are serious about building on that early foresight and success. Even those that are ahead of the curve will need to review their talent needs as a result.” Sheffield Haworth offers a look at the most likely impacts of AI on PE talent and leadership.

Impact 1: PE Leaders Must Understand how AI can Increase Operational Efficiencies.

Basic admin remains a huge drain on many PE firms’ resources, according to the Sheffield Haworth report. “Most companies still rely on rudimentary IT tools like Excel or PowerPoint for most tasks,” it said. “The data processing required for due diligence and legal compliance when acquiring companies is long, complicated, and still reliant on people using spreadsheets, therefore subject to human error.”

In a competitive bid scenario, the speed a PE firm processes relevant data can mean the difference between winning or losing a deal. AI tools that help dealmakers automate tasks and ensure compliance while reducing human error can save time and resources and are becoming increasingly popular. According to Kash Rangan, senior U.S. software analyst at Goldman Sachs Research: “Generative AI can streamline business workflows, automate routine tasks, and give rise to a new generation of business applications.”

Sheffield Haworth explains that the AI-driven high-performing PE firms of the future will certainly need some form of task automation to remain competitive.

Impact 2: PE Leaders Must Understand how AI can Improve Investment Selection.

Another use of AI in private equity is deal sourcing and selection, Sheffield Haworth notes. Blackrock is one of the small number of forward-thinking PE firms already using AI to sift through huge volumes of data about people, companies, and deals, and flag potential investment opportunities early.

Related: A Look at Key Trends in Executive Recruiting for Private Equity-Backed Companies.

“Some PE firms leave it at that, but others go on to leverage AI for due diligence,” the Sheffield Haworth report said. “We’ve already mentioned how useful this can be for automation and time and cost reduction, but due diligence tools can also be a huge boon when selecting from a variety of potential opportunities.”

Impact 3: PE Leaders Must be Able to Communicate the Benefits of AI to Multiple Stakeholders. 

“In both impacts above, existing AI solutions are there to expedite human decision-making,” the Sheffield Haworth report said. “The distinction – that AI is a way of speeding up and augmenting human decision-making rather than replacing it – is important to understand. Many PE leaders are likely to face opposition to widespread AI adoption from within their firms – unless they’re able to clearly and convincingly communicate the benefits to everyone.”

Opportunities and Challenges in Private Equity Recruiting
Private equity firms are saying that talent is the most important factor in driving growth. While financial engineering, inorganic growth, and market expansion remain important tools in the private equity toolbox, talent continues to emerge as key to growing companies and achieving the investment thesis, according to a report from Bespoke Partners. Yet unlike strategic assets, intellectual property, or other resources that fuel growth, talent can be notoriously difficult to optimize. In fact, the biggest challenge for the PE sector is getting talent right, according to Nat Schiffer, managing partner at The Christopher Group. “PE firms often compete with other financial services firms, technology companies, start-ups, and other industries for the limited pool of qualified talent with the necessary skill-sets and experience for the PE industry,” he said. “The intense competition for top talent can make it challenging to attract and retain qualified candidates who may have multiple options.”

“PE firms are often stereotyped as late adopters of technology, relying on manual IT tools for admin tasks and hard-won market experience when it comes to identifying and making deals,” the report continued. “This isn’t necessarily true: as we’ve discussed, several PE firms are ahead of the curve. However, those needing to gain ground and make the most of AI tools will likely need to work on creating a culture of innovation as they embed AI into the business, and that calls for excellent communication skills.”

Impact 4: PE Leaders Must be Aware of the Potential Downsides to Using AI.

Sheffield Haworth also says that there are genuine potential downsides to using AI in PE firms. “Leaders must understand what these are, so they don’t make poor decisions about how to deploy the technology,” the firm said. “PE leaders need to be aware of these nuances and potential pitfalls. Not just internally, but also across the AI Service-as-a-Software (SaaS) providers they work with and their portfolio companies.”

Impact 5: PE Talent Leaders Must Focus on Attracting Top AI Talent.

The first and most obvious workforce impact is that PE firms will need to hire experienced professionals with backgrounds in AI, data science, machine learning and machine intelligence, the Sheffield Haworth report explains. “Even if they choose not to develop in-house AI algorithms, they’ll need people to effectively deploy and manage third-party solutions and platforms,” it says. “PE firms will find it difficult to recruit and retain staff equipped with these increasingly valuable skillsets as the competition for them outstrips supply.”

Related: How Talent is Driving Private Equity Success

Sheffield Haworth notes that talent leaders in private equity must therefore think about what AI talent they’re likely to need in the short, medium, and long term, and work on making themselves appealing to those candidates. How can they stand out in a hyper-competitive marketplace?

Impact 6: PE Talent Leaders Must Leverage as Many Talent Channels as Possible.

Forward-looking PE firms are already looking at their potential AI talent upskilling needs. With that in mind, Sheffield Haworth says that there are many ways companies can upskill themselves, including:

• Reskilling employees via training.

• Hiring from top-tier global tech firms.

• Hiring AI talent straight out of top technical university programs.

• Attracting talent from smaller tech companies.

• Hiring expertise from industry organizations, professional associations, and think tanks.

“Those that make themselves better equipped to utilize modern technologies will attract and engage better talent and ultimately triumph,” said Richard Barrett, executive director in global functions practice at Sheffield Haworth. “AI will have an enormous impact on decision-making across private equity, improving due diligence, creating sharper insights, and enhancing the performance of the portfolio.”

“In the search for talent and skills, PE firms should be open-minded about the solutions they try and prepared to look at all potential avenues,” he said. “When it comes to talent selection, partnering with top-tier consulting firms is also likely to save time and mistakes by leveraging existing market expertise. This is especially valuable in the search for technical talent in a hyper-competitive market.”

“AI and generative AI offer huge potential upsides for PE firms willing to deploy the technology and able to understand and mitigate the potential risks,” the Sheffield Haworth report said. “AI clearly has the power to augment private equity firms’ existing expertise. Companies that gain first-mover advantage are likely to speed ahead of their competitors when it comes to leveraging the operational and investment potential of AI over the next few years. To achieve that, its vital PE leaders develop the skills they need to ride the AI wave. Otherwise, they risk drowning while the competition sails on by.”

Sheffield Haworth, founded in 1993, is a global executive search, talent advisory, and interim consulting firm. The organization partners with clients around the world to provide tailored solutions for their business and talent needs at the senior management level. The firm has 10 offices throughout the Americas, Europe, Middle East, and Asia-Pacific. It serves clients in the financial services, business and professional services, and technology industries.

Related: The Market for Senior Roles Heating Up at Private Equity Firms

Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Executive Editor  – Hunt Scanlon Media