Private Equity the Overlooked Winner of the AI Race
AI is set to revolutionize nearly every aspect of our world, but the billion-dollar question remains: who will emerge the winners and losers in this AI-driven future? While much attention is focused on tech giants, an underrated winner is emerging: private equity firms.
AI is set to supercharge private equity in three key ways:
- Custom Software: AI makes bespoke, cost-effective software a reality, driving efficiency and giving firms a competitive edge.
- AI-Enhanced Employees: AI boosts worker productivity, leading to significant EBITDA margin expansion.
- Smarter Decision Making: AI excels at data analysis, enabling faster, more informed investment decisions.
Bottom line: Private equity firms that embrace AI will dominate the investment landscape.
Private equity is on the brink of a major transformation, and here’s why they’re poised to be the biggest winners in the AI race:
1. Cheap, Reliable, and Custom Software for Every Portfolio Company
Software has immense potential to drive efficiency, particularly for the operationally heavy and technologically laggard businesses that private equity funds often acquire. The challenge has always been that existing software doesn't fit the unique needs of each business well enough. Customizing and maintaining software has traditionally been a costly nightmare, often causing more problems than it solves.
AI is turning the world of software engineering upside down. We've moved from simple code completion that drives 50% performance gains to full-blown AI software engineers, with reports suggesting that GPT-5 matches senior engineer levels of proficiency. We're entering an era where cheap, reliable, and bespoke software is available for any business. The barrier to creating tech-enabled businesses will no longer be cost but rather inertia and know-how. Private equity firms, being highly motivated and sophisticated owners, will rapidly adopt custom software that allows them to outcompete alternatives in the market.
2. AI-Enabled Employees Will Drive Up Profitability
Contrary to the naysayers who believe AI will replace workers, AI as a companion to workers will make them exponentially more effective. Think of AI as a highly inexperienced but eager-to-learn intern. Without oversight, it's useless, but with proper supervision, it can accomplish serious work. Unlike a human intern, AI costs almost nothing and is infinitely scalable. Workers bolstered by an army of "AI interns" will be able to increase their output significantly.
Private equity firms, with their focus on operational excellence and the benefit of scale, are well-positioned to enable their portfolio's workforce to become AI-enhanced. These AI-enhanced workforces can not only scale to serve more customers with ease but also provide better, faster, and more personalized service. This combination leads to top-line growth with minimal change in operating costs, driving meaningful EBITDA margin expansion.
3. The AI-First Private Equity Firm Will Be a Powerhouse of Efficiency and Decision Making
AI excels at finding, analyzing, and restructuring critical information among a sea of data. For private equity firms, 95% of the investment team's work is information curation—from digesting company data to conducting hours of expert or customer interviews. This painstaking process is slow, costly, and often biased. Most problematically, it’s impossible to conduct this process thoroughly for every opportunity, leading to missed hidden gems and wasted efforts on walking-dead deals.
Private equity firms that embrace AI as a core tool in their diligence process will become unstoppable winners. With AI, these firms can pick winners with complete information and move faster than the competition to secure key opportunities.
The Future of Private Equity in the AI Era
Today, everyone has Nvidia on their list of AI winners, but private equity should be on that list too. While some firms may resist the winds of change, the elite and forward-thinking funds that reconfigure themselves to be AI-first will emerge as generational winners. By leveraging AI to enhance software, empower employees, and optimize decision-making, private equity firms can secure their place at the forefront of the investment world.
In a world where AI will change everything, private equity stands to gain immensely. The firms that adapt will not only survive but thrive, accruing the substantial benefits of this technological revolution.
What are your thoughts on the impact of AI on PE? Eager to hear from folks that disagree or think AI will impact PE even beyond the ways I’ve identified.