In this difficult, low-exit environment, players throughout the PE and VC market are feeling pressure to act. Fund managers and operators alike may find the answer in technology.

Many firms we work with are revisiting portfolio companies’ data infrastructure and strategy, and using advanced analytics themselves to locate deals that would not have come across their desk. It is giving them a unique advantage at a time when the market seems paused.

In this article, we explore ways both funds and portfolio companies can use technology. It is an excerpt from our new report, 2024 Private Equity Opportunities. For the full analysis, download a copy.

Action: Use advanced analytics to find deals

Today, just 16% of private equity firms say they are using AI, but 80% expect to use it within three years according to Bain & Company. The same way cryptocurrencies and blockchain recently created all new asset classes, AI may create all new ways of understanding and predicting performance. Consider deputizing a team member to explore ways technology can improve your fund’s processes and assist with analysis and due diligence.

While AI use is still less common among emerging managers, established funds tell us they are already using AI to improve dealmaking. They are using algorithms to accelerate due diligence and compliance, and to produce internal data analytics that allow managers greater insight and oversight. Many of these technologies remain impractically expensive for emerging managers, but this may soon change.

Every fund should explore how technology can help it:

• Better risk-rate a portfolio company
• Compare one potential allocation against another
• Mine existing data for unconventional insights
• Normalize an allocation’s data and compare it to peers
• Analyze an allocation’s technological maturity

In this era, it is essential that the technology strategy be closely aligned with the investment thesis, at the fund level and the portfolio company level.

At the same time, managers who embrace technology must also embrace cybersecurity. Anything online can be compromised and funds are holding sensitive data on their partners, down to social security numbers and financial information. They cannot allow their small team to become a threat vector. If they do not have robust help with security, which is a very different skill set from IT, they should consider outsourcing that work to professionals.

Action: Assess portfolio companies for AI-readiness

The primary barrier to AI adoption among portfolio companies is insufficient data. This is likely due to the fact that nearly half — 47% — have not updated their ERP system in five years or more. This is a much worse rate than non-PE owned companies and suggests portfolio companies would do well to modernize.

Outside consultants will be able to analyze each portfolio company’s technological maturity, and recommend areas where things are easily automatable. For example, if a B2B company’s customer lifecycle is a largely manual process highly reliant on people, the expert partner can advise them to launch a customer lifecycle management software, which can digitize pulse surveys and understand customer behavior based on orders. Such a system would also alert customer managers as to where to spend their valuable time, and help eliminate wasteful interactions.

Another opportunity is in financial reporting. A recent study found that CFOs are 27% more likely to be removed when their company has too few accountants. Yet hiring more accountants may be difficult due to the talent shortage. These portfolio companies may be much better off outsourcing the finance and accounting work to achieve higher quality reporting with fewer full-time people. This is increasingly practical given how much of any given portfolio company’s financial data is now in the cloud.

One of the benefits of helping portfolio companies find technology and AI opportunities and bring more of their systems online is the opportunity to standardize. Many funds have been lax about this in the past, but now is the time to ensure consistent reporting across your entire portfolio to more easily identify opportunities and leverage.

For more insights, analysis, and PE and VC opportunities, download the full report.

To learn more or discuss these topics, please contact Alexander Reyes at areyes@citrincooperman.com.