Nicholas Neveling explores how GPs are harnessing big data and AI not only to boost portfolio company performance, but also to provide a competitive edge when it comes to sourcing and executing deals

Private equity is at a digital inflexion point as growing numbers of managers embrace technology to gain a competitive edge in the core business of deal sourcing and portfolio management.

When it comes to back-office functions, technology has played a crucial role in helping managers meet rising investor expectations for faster, more detailed reporting and fund accounting. But digitalising the private equity front office has been a tougher nut to crack in an industry where ‘pressing the flesh’ and the black books of savvy dealmakers have long been the primary drivers of dealmaking and value creation.

Rapid developments across deal software, artificial intelligence and data analytics, however, are reshaping how managers think about supporting core front-office functions, and are driving a surge in uptake for technology in front-office settings.

A poll of 110 private equity LPs by Coller Capital found that 75% of respondents saw artificial intelligence as a useful tool for originating dealflow, with 60% saying it could be useful as part of a deal assessment or post-transaction portfolio company engagement. In a separate survey published at the end of 2023, EY found that 74% of private equity-backed portfolio companies were already using or piloting the use of AI solutions in their transaction processes.

“Firms are incorporating digital lenses into target screening, using alternative data sources to conduct market screens, using large-scale company data to identify add-on opportunities and leveraging data from other assets in a portfolio to inform investment theses,” says Andy Roberts, an associate partner at Bain & Company. “We’ve seen, for example, firms using credit card and e-receipt data, web traffic, search traffic, blog mentions, Amazon scraping and tech reviews to spot fast-growing brands that are under the radar.”

The strategic importance of GPs’ tech enablement has become especially apparent through the current macroeconomic downcycle.

GPs with the digital capability to collate data quickly and accurately, and gain early visibility of portfolio performance, sector trends and deal valuations, have been much better positioned to navigate market headwinds and keep deal pipelines flowing in flat markets.

“Looking back at 2023, global private capital dealmaking was much slower compared to the record activity in 2021 and 2022. Our analysts view this as a market correction, rather than a collapse [...] this correction has made reliance on data and insights more important than ever,” says John Gabbert, founding chief executive of private markets data and intelligence provider PitchBook.

Technology is also becoming increasingly important for GPs when articulating their investment propositions and points of difference to prospective LPs.

“Tech enablement is becoming an important differentiator for GPs, and more and more investors now demand that GPs utilise technology to enhance their operations,” says Yuriy Shterk, chief product officer of Allvue, a specialist alternative assets software developer. “Accessing data and being able to slice and dice it to understand how capital is being deployed is becoming an essential capability that LPs want to see managers evidence.”

Still early days

Progress with the implementation of front-office digital tools, however, varies significantly across the industry, with many firms still testing the waters and assessing their specific organisational requirements.

“Private equity is a young industry and managers are working out what processes can be improved and where technology can have an impact,” says Yann Magnan, chief executive and co-founder of 73 Strings, a software company focused on illiquid asset classes. “The priority for all managers is to identify the tasks that are necessary but relatively low value, and can be taken off deal teams and managed with digital tools.”

Pinpointing these workflows and selecting an appropriate technology solution, however, is not always obvious, and there is a delta emerging between private equity’s technology leaders and managers that are only just embarking on their digital transition.

At one end of the spectrum, some managers have recruited dedicated development teams to build proprietary data analytics platforms that use machine learning and algorithms to identify deal targets and scope out transactions early in the origination pipeline. At the other end, some managers that have run successfully for years using very basic technology tools are now looking to upgrade their front-office technology infrastructure.

“Across the market, dealflow is much more visible and much more competitive, and if you want to win deals you have to have all of your ducks in a row,” says Matthew Hardcastle, vice-president of industry solutions for Intapp DealCloud. “All of your deal intelligence and knowledge has to be pulled together in one place. You want to be investing firm time in the right assets, rather than just reacting to what is coming in. Data and pipeline management are central to that.”

The technology is there to make resources and contacts available to portfolio company teams without overwhelming them
Lucie Mills, NorthEdge

Data demand

Aggregating data into one place is the starting point for building this capability. This enables firms to build deeper, more proactive visibility of key performance indicators for existing portfolios in the first instance, which can then be expanded to cover shadow portfolios and potential target companies.

“Structuring data correctly and aggregating data into a single place is the first step,” Magnan says. “Collating data from across a firm into one data warehouse is mainly a mid-office function, but the process does have impact and potential for the front office. The ability to extract meaningful benchmarks from existing portfolios gives GPs a much clearer picture of the best-performing strategies and value creation levers. This intelligence feeds into the deal origination process and provides deal teams with insight into the most attractive companies and sectors to invest in.”

Firms that have successfully aggregated data and built data lakes are now taking the next step, layering third-party data and AI tools over their data pools to drive further gains.

“The most successful firms have shown great discipline around how they triage and manage their deal pipelines and are now taking that further. Once processes are running well, forward-thinking managers are exploring how they can use third-party data and ChatGPT-like functionality to summarise deal intelligence and make people more efficient,” Hardcastle says.

Data providers have recognised this demand and are supporting managers by developing tools that facilitate the integration of their data into the data lakes of managers.

“Our solutions are often custom-built to each client's unique requirements,” says Laura Gonzalez, EMEA and customer success managing director at PitchBook. “We offer direct data feeds, CRM (customer resource management) integration, and API (application programming interface) solutions that have customisable queries and robust analytical tools to digest large quantities of data within existing business systems.”

Gaining an edge

Firms that have successfully embedded digital tools into front-office functions say they have been able to accelerate target identification and expedite
deal conversion.

“Put simply, our time to target identification is faster, and our quality of insight and foresight stronger, which drives our target discovery to be six to 12 months or more ahead of the market, and our conversion ratios of lead-to-execution substantially ahead of peers,” claims Yair Erez, a partner at midmarket buyout firm Stanley Capital. Read our interview with Erez on page 22.

Large-cap manager Permira, meanwhile, has established an advanced analytics unit within its value creation team to provide direct support to portfolio companies and explore ways to drive growth and efficiencies through the use of data analytics and AI.

“Broadly speaking, our strategy is to work with and encourage our portfolio to experiment with GenAI applications, and as part of that, leverage the portfolio as a distributed laboratory to rapidly prototype solutions and then share the learnings within the portfolio,” Permira vice-president David Floyd says (turn to page 8 to read our full interview with Floyd). “There is an average of three GenAI development projects currently live in each portfolio company – over 200 in total – with new initiatives being identified continually.”

In addition to its work directly at portfolio company level, Permira has also developed internal tools to support front-office work. One of these, Gaia, is an internal platform the firm developed to run AI tools securely across all of its internal data.

“The initiative started as an experiment to see if we could use generative AI effectively, and we are now in the production phase. We have seen teams across the whole organisation use it,” Floyd says. “It is still early days but initial indications suggest that every individual using the platform saves between 5% and 11% of their time every week. The exploration and testing of ways to use the technology to automate more simple tasks, as well as handle autonomous workflows, is an ongoing process.”

Permira has also built a second proprietary platform called Prism, which provides readouts of a target company’s customer churn ‘health’, as well as its upselling and downselling performance.

Accessing data and being able to slice and dice it to understand how capital is being deployed is becoming an essential capability that LPs want to see managers evidence
Yuriy Shterk, Allvue

Proprietary or in-house?

Reflecting the industry’s wider approach to operational support, firms have used a mixture of proprietary and third-party technology when digitalising front-office workflows.

Permira, for example, has explored using complementary third-party technology options to support and enhance its Gaia and Prism platforms. These include AI-powered enterprise search tools such as Hebbia and Glean, as well as automated workflow tools like Dataiku.

Midmarket manager NorthEdge, meanwhile, uses Microsoft Dynamics as its CRM and third-party data visualisation tool Cobalt, but also works with AI academics at the Alliance Manchester Business School to develop bespoke AI-powered deal-filtering tools.

In addition, NorthEdge has built a proprietary portfolio support tool called Nexus, which serves as an interface between portfolio company senior management teams and the NorthEdge operating partner network.

“Nexus has been a really efficient way to bring relevant groups of people together across the portfolio to share knowledge and information and facilitate networking. The technology is there to make resources and contacts available to portfolio company teams without overwhelming them,” says NorthEdge partner Lucie Mills (turn to page 14 to read our full interview with Mills). “Nexus is a ready-made content hub – covering everything from pricing strategies and recruitment to customer engagement and supply chains – that portfolio companies can draw from whenever they require it.”

Dealcloud’s Hardcastle says that managers will typically turn to established software providers for core areas such as CRM, portfolio monitoring and fund accounting technology, then develop in-house tools to cover more specialist, bespoke internal requirements.

Working in tandem

Whether managers are using in-house technology, off-the-shelf software, or a combination of both, the industry is still a long way from reaching a point where technology can realistically replace the value of human insight in the dealmaking process.

Critical thinking and personal relationships are paramount. The role of technology is to produce actionable data that complements the deal team’s judgement and allows dealmakers to spend more time with management teams and less time on manual tasks that can be automated and streamlined.

“We are not trying to replicate everything we do, but rather harness technology to give us more insight, help us get to things quicker and support the building of relationships with potential deal targets and portfolio companies,” NorthEdge’s Mills says.

The ability to build networks and personal relationships with management teams and advisers is likely to remain the most central element of successful dealmaking for some time yet.

But in order to identify and reach these key stakeholders before the competition, it is becoming increasingly important for managers to overlay human insight with digital capability – something even LPs are now keeping a watchful eye on, further fuelling the digital arms race among GPs keen not to get left behind in tough fundraising times.