The private equity AI gold rush is on, with PE and venture capital firms pouring more than $10 billion into the artificial intelligence and machine learning sector in the first half of 2023 alone, according to
Ultrahigh net worth individuals, families and family offices are playing a key role in this story. These investors place a large portion of their wealth in private equity, providing a significant share of the assets that are
It's easy to see the appeal of AI technologies and the desire to capitalize on them — it is reasonable to expect companies that
AI is compelling because it gives users access to a vast amount of knowledge, data and experience packaged in usable ways. At our firm, we emphasize the technology's potential not to replace human capabilities but to enhance them. For instance, a doctor diagnosing a patient calls upon all their education and life experience in making a diagnosis. But imagine if that doctor could also easily access the distilled knowledge and experiences of thousands of doctors? They could develop a better-informed opinion and provide better medical advice.
But like any transformative technology, AI presents a mix of opportunity and risk — and comes packaged with its own
As our firm helps clients navigate their private equity positions, we see a lot of potential for disruption and risk. Here are our key concerns.
Job losses
As with many tech breakthroughs before it, AI could lead to job losses — but this time encompassing a range of knowledge workers, including data analysts and creatives, in an array of professions. Depending on the
Social and consumer backlash
Leaving the thinking to AI doesn't always lead to better outcomes, especially in the absence of human oversight. Consumers may react negatively to service models based on machine learning instead of human judgment. Companies may damage their reputations by using flawed data or drawing the wrong conclusions from it.
Political and regulatory scrutiny
Politicians and regulators are already calling for
Valuations and costs
We are also concerned that these risks may be exacerbated by the high valuations currently attached to AI companies and the generally higher costs associated with private equity investing. With interest rates rising, we would expect to see a valuation reset in the private and venture capital space. The hype around AI has forestalled that reset so far, but historical precedent says it is coming.
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As private equity firms continue to race ahead on AI, we are not necessarily recommending that clients scale back on PE holdings, but we are advising them to stay within their risk budget as they move forward. We think this is a good time for clients to prioritize liquidity and risk as they assess their portfolios. With interest rates rising and returns on liquidity investments having greatly improved, clients should evaluate and enhance liquidity positions as needed to eliminate any constraints. For those looking to add private equity exposure, we recommend classic risk management techniques like dollar-cost averaging to guard against short-term volatility.
We also recommend selecting private equity managers who are experienced and knowledgeable about AI opportunities, costs and risks. If you're going to tolerate the potential risk in private equity, you want to ensure you have a high conviction in the investment.
As AI innovators compete and the markets sort out the winners from the losers, high-wealth investors should expect a lot of fits and starts. But for those who can withstand the interim uncertainties and keep a long-term perspective, the benefits could be meaningful.
