AI and Blockchain are Reshaping Private Equity
15th May 2018 1868 - Blog Posts
How AI and Blockchain are Reshaping Private Equity
Private Equity is being transformed in unprecedented ways by the implementation of technologies such as artificial intelligence and blockchain. In what has been a markedly traditional industry, there are now clear use cases and benefits to be gained. How is technology going to help Private Equity Compliance?
Blockchain is the technology underlying cryptocurrencies including bitcoin and ethereum. It is a decentralized ledger of transactions across a peer-to-peer computer network. It is ‘decentralized’ because each user on the network can have their own synchronized copy of the ledger. This means that all users can see and therefore confirm that a transaction has happened and been recorded at the same time. Blockchain has been hailed as an immutable, unchangeable, and uncrackable record of transactions.
For Private Equity firms there is an opportunity to realise efficiencies in the underlying portfolio companies, reduce risks and ultimately drive fund IRR. Creating competitive advantages for the underlying portfolio assets will generate improved margins and increase exit multiples. To some extent it can even change entire business models in particular in the financial services sector. Specific use cases include smoother data flows, automated compliance, fund transfers, and ICOs.
Blockchain has many applications focused on the transaction side of financial services although many traditional business models are applicable. For example, HSBC have recently completed the first trade finance deal using blockchain technology in a push to boost efficiency. One can easily see how similar applications can be used to reduce the transaction time from several days of paperwork to a paperless task which takes a matter of minutes.
Artificial intelligence is the result of clever machine programming – usually complex algorithms. If we think about the traditional private equity environment, fundraising was often done by putting in calls to institutional investors one on one. However these days technology can make this process more efficient by using profiling to make campaigns far more targeted.
Artificial intelligence has the ability to drive more efficient deal sourcing by synthesizing big data on deals, Pitchbook for example, and source more relevant and higher qualified leads. AI also has the ability to drive deal evaluation through smarter simulations. Deep probabilistic programming (DPP) combines statistics, deep learning and probability models to drive better portfolio optimization and risk estimation. More accurate modelling can help PE funds drive their IRR.
Two primary areas where AI is making waves are:
- Deal sourcing – One of the primary roles of a GP is to continuously scan the market and find opportunities. This process takes a lot of time and effort as it is essentially manual. AI can be used to review a large data set quickly and efficiently – far quicker and at a higher quality than humans could.
- Deal Evaluation – Using AI, models can be built fairly quickly to take away the manual effort of evaluating investment decisions. AI is able to analyse market data on a much granular and reliable basis than a vendor due diligence team. This is another way funds could drive IRR.
It is evident that the application of artificial intelligence and blockchain is fairly limited within the private equity industry at present. However, the benefits of both technologies are clear. As firms continue to look for ways to differentiate and get an edge over their competitors, it is likely that these technologies will become more prevalent in the industry. Learn how Lawson Conner’s services and technology solutions can reduce risks and processing time.
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