Private equity companies are using advanced technology in myriad ways, but, when it comes to deal origination, there are as many shortcomings as there are opportunities.
When people discuss the capabilities of advanced technology, it can often end up sounding as if it’s some kind of panacea. And while we can certainly do many things nowadays that would have seemed straight out of science fiction just a few decades ago, technology is not, and never will be, a silver bullet for the investment industry.
In this second article on how technology is being integrated into deal origination, we’ve gleaned insights from a range of experts through Canopy. On the whole, they are positive regarding its long-term potential, but to avoid wasting time and resources, and ensure that trust remains with all stakeholders, business leaders ought to be aware of its shortfalls, limitations and critiques just as much as knowing what it can do.
Back to reality
Advanced technology for deal origination, according to TC, who is a Managing Director at a European PE firm, is not always that advanced in practice. For example, “automated screening tools generally automate more tedious junior work rather than truly generating great ideas today.” Private equity firms, therefore, ought to be exacting in where they use technology for ideation, ensuring the balance remains tipped towards coming up with fresh avenues for research instead of overwhelming analysts and wasting their time.
Backing up this point, TC also highlights the difficulties that some tools have when differentiating between niche categories within sectors. “Automated tools aren’t yet good enough to separate esoteric subjects. For example, pharma products, services, packaging, et cetera, could all come up in one search,” he adds. It seems then, on this front at least, human insights remain the stronger link.
To avoid this kind of issue, private equity companies ought to constantly evaluate such software and seek feedback from all stakeholders using it, right down to the junior level. Such employees are often forgotten about when it comes to technology adoption decisions, even though they might have some of the best insights on it.
Human versus artificial intelligence
With myriad generative artificial intelligence (AI) platforms available or under development, the media have been highlighting examples of its deficiencies and even how biases can be integrated in alarming ways. These are putting to question the idea of the ‘intelligence’ in AI. But, understandably, it’s all still at a fairly early stage, with the potential for it to play a bigger role in deal origination in future. This idea is underscored by a partner at a VC organization, who believes that “they're not quite there yet in terms of robustness, in terms of the accuracy of kind of the analysis that they're putting together. But I think that AI tools will play a big role soon in things like diligence, sourcing, et cetera.”
Throughout history, there has always been backlashes to technological progress, with the idea of them corrupting our thought processes or society a recurring theme. The philosopher Friedrich Nietzsche, for example, claimed that the typewriter caused him to think and write differently.
And in an industry where human connections and judgements are so central, not to mention highly regulated, can technology like AI ever really be fully integrated? When it comes to how companies operate and the technology they use, it’s not just about what the business leaders want, but also how their customers react to it.
Toeing the line
Concerning investor sentiment, it’s simply a balancing act, according to one senior investment manager.
“While technology really enhances the efficiency and accuracy and deal origination, there's potential concern regarding the perceived devaluation of the human element and experience and sort of the nuanced judgement in the process.”
He adds that there are also concerns regarding the excessive reliance on technology, which can lead to other crucial parts of deal assessment, like relationship building, being overlooked. However, effective communication and transparency can assuage such concerns while building trust.
This might all be overpreparing at the moment, though. For Nicholas Umar, a private equity VP at Affinity Equity Partners, “we have not received any backlash from using any of such technology.” His advice is much the same as the previous expert. “It is really the job of the investment professional to prove to the investors that we have done enough. And the technology in this case is helpful. It’s not compromising on the level of due diligence,” he opines. Much as the previous expert states, it’s all about clarity, no matter how much advanced technology has been adopted.
As the old saying goes, a tool is only as good as its user. Technology is both a help and a hindrance, according to the interviewed experts. Used wrongly, it can overwhelm analysts with tedious work and superfluous information. However, if applied appropriately and thoughtfully, advanced technologies have the ability to identify potential deals, summarise market trends and create smoother communication channels.
There’s no escaping the realities of these advanced technologies – and companies that do not adopt may find themselves at a disadvantage compared with their peers. But by striking the right balance between technology and human intuition, business leaders can open up new possibilities.
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