Market Size and Overview

The adoption of Generative AI (GenAI) in private equity firms is becoming increasingly significant, presenting a disruptive force across a variety of applications. These use cases can generally be grouped into two main categories: portfolio optimization and market segmentation.

In 2022, the market for GenAI within this sector was valued at $178 million, with $92 million attributed to GANs (primarily used for generating images, designs, and other visual content) and $86 million from VAEs (mostly leveraged for data-related tasks).

Looking ahead, the market is projected to experience substantial growth, reaching a value of $1.1 billion by 2032. Of this, GANs are expected to account for $600 million, while VAEs will contribute $496 million. This expansion represents an impressive compound annual growth rate (CAGR) of 20%, underscoring the pivotal role that GenAI technologies will play in shaping the future of private equity operations.

As previously mentioned, the market can be divided into two primary segments, each offering distinct value to private equity firms. The report further breaks down these segments as it progresses. In 2022, market segmentation held the larger share, representing 56% of the market, while portfolio optimization accounted for 44%.

• Market segmentation involves leveraging GenAI to analyze and categorize vast amounts of data, enabling firms to better understand customer behavior, identify untapped opportunities, and refine target markets. GenAI models can uncover insights that traditional methods might overlook, facilitating more precise investment decisions and strategies.

• Portfolio optimization, on the other hand, focuses on improving the performance and value of assets within a firm's portfolio. GenAI assists by analyzing operational efficiencies, market trends, and financial data to recommend adjustments that can enhance returns, streamline operations, and predict potential risks.

Use cases and penetration

Private equity firms are increasingly applying Generative AI (GenAI) across various aspects of their operations, including value creation, improving operational efficiency within portfolio companies, enhancing due diligence processes, and optimizing pricing strategies. Despite these advancements, a significant portion of the market remains untapped.

According to a review of multiple consulting reports, the penetration rate of GenAI in PE firms averages around 61%. EY reports the highest adoption rate at 74%, indicating that a majority of PE firms are actively leveraging GenAI solutions, while Sourcescrub presents a more conservative estimate, with only 52% adoption. These figures are based on surveys conducted by the respective firms, reflecting the varying degrees to which PE firms have embraced GenAI technologies in their operations. As the technology evolves, there is considerable potential for broader adoption and deeper integration.

Main Use Cases For GenAI

PE firms are quickly realizing the potential of GenAI in enhancing various stages of their investment process, with applications spanning across deal origination, portfolio management, compliance, and legal review. Below are some of the key use cases where GenAI is making an impact:

• · Deal Sourcing and Origination:

  o Advanced Predictive Analytics:

  GenAI can leverage predictive models to identify potential investment opportunities before they become widely recognized. By analyzing historical data, industry trends, and real-time events, GenAI can pinpoint companies poised for growth, financial distress, or acquisition. This capability allows PE firms to stay ahead of market shifts and competitors, offering a proactive rather than reactive approach to deal sourcing.

  o Natural Language Processing (NLP) for Sentiment Analysis:

  GenAI can enhance deal origination through advanced sentiment analysis, powered by NLP. By scanning social media, earnings call transcripts, press releases, and even customer reviews, GenAI can assess the public and investor sentiment toward specific companies or industries. This insight helps PE firms identify emerging trends, market gaps, or undervalued targets that may not yet be apparent through traditional financial analysis.

  o Customized Data Streams and Insights:

  Instead of relying solely on traditional financial databases, GenAI can aggregate data from a wide array of sources, including unstructured data sets like patent filings, regulatory submissions, or technological advancements. These customized insights allow PE firms to discover niche market opportunities or sector-specific innovations that align with their investment thesis.

  o Automated Competitive Landscape Mapping:

  GenAI can automatically map out competitive landscapes by analyzing both public and proprietary data sources. This process helps PE firms evaluate a company's position within its industry and identify potential acquisitions or competitors. GenAI can also predict M&A activity within sectors, giving PE firms a clearer view of consolidation trends and possible targets.

  o Enhancing Human Networks with AI-Driven Social Graphs:

  GenAI can also optimize the use of human networks by constructing AI-driven social graphs. These models map out key relationships between executives, board members, advisors, and other stakeholders across various industries. This mapping reveals hidden connections and opportunities for partnership or acquisition that traditional deal sourcing methods may overlook.

  o Refining Target Screening:

  Beyond simply identifying targets, GenAI can assess companies against multiple dimensions like ESG compliance, scalability potential, intellectual property, and technological capabilities. By using multi-layered screening criteria, PE firms can prioritize opportunities that align with long-term strategic goals, not just immediate financial metrics.

• Portfolio Monitoring and Optimization: GenAI enables real-time portfolio monitoring by extracting and processing vast quantities of unstructured data from documents like capital account statements, investment schedules, and investor reports. This reduces the manual workload and enhances the ability to visualize key data. GenAI's ability to convert this data into structured formats means PE firms can analyze portfolio performance more effectively, identify risks, and optimize value creation strategies for their portfolio companies.

• Investor Relations and networking: Managing investor relations has always been a resource-intensive task, requiring personalized communication and constant updates. GenAI enhances this process by automating responses to investor inquiries, profiling communication styles, and analyzing engagement with investment materials. This not only improves the quality of investor interactions but also enables firms to personalize communication, strengthening relationships with key stakeholders.

• Compliance and Due Diligence Questionnaires (DDQ): Compliance and regulatory reporting are traditionally manual and time-consuming processes, with potential for human error. GenAI can automate these tasks by completing due diligence questionnaires based on previously answered questions.

• Virtual Assistants and Operational Efficiency: AI-powered virtual assistants and agents are transforming routine administrative tasks like scheduling meetings and managing emails. By integrating these assistants into daily operations, PE firms can free up valuable time and resources, reducing operational costs while enhancing service quality. 

Portfolio monitoring and valuations

• As mentioned previously, portfolio monitoring and optimization are rapidly becoming some of the most impactful applications of Generative AI (GenAI) for private equity (PE) firms. Today, the process of managing a portfolio—tracking company performance, identifying operational inefficiencies, and projecting future growth—requires substantial manual effort and data analysis. However, with GenAI, PE firms are positioned to automate and streamline these activities, enabling more accurate and timely decision-making.

• According to an analysis by Deloitte, the use of AI for portfolio valuations is expected to increase dramatically over the next decade. By 2030, nearly 25% of PE firms are projected to incorporate AI specifically for portfolio valuations, a sharp rise from an estimated 5% in 2024. This trend reflects the growing recognition of AI's ability to significantly enhance the depth, accuracy, and frequency of portfolio assessments.

Barriers to Gen AI adoption

In navigating the adoption of Generative AI (GenAI), private equity (PE) firms face several significant challenges that hinder rapid implementation.

• One of the primary obstacles is understanding where and how to begin integrating GenAI solutions, with 63% of firms expressing uncertainty, which often results in a "wait and see" approach.

• Privacy and security concerns are also prominent, with 59% of firms worried about data leaks following several high-profile incidents, making them hesitant to proceed without clearer safeguards in place.

• Lastly, 34% of firms report that cost considerations have shifted GenAI to the back burner, as other digital priorities like CRM upgrades and cloud migration take precedence.

  

Investments overview

The value of private equity and venture capital-backed investments in generative AI companies more than doubled in 2023, despite a broader decline in overall M&A activity. According to S&P Global Market Intelligence, private equity firms invested $2.18 billion in generative AI companies in 2023, a significant increase from the $1 billion invested the previous year. This surge in capital came at a time when private equity-backed M&A across other sectors experienced a sharp downturn.

By early 2024, deal activity continued at a strong pace, with $250 million in private equity-backed investments recorded between January 1 and February 15, already surpassing the total for the first quarter of 2023.

The rise in generative AI investment has been fueled by a "frenzy" following the launch of ChatGPT in November 2022, which quickly gained widespread usage. Investment reached a peak in the third quarter of 2023, with $927.7 million in private equity-backed deals, a dramatic rise from the $121.5 million recorded in the same period the previous year.

Geographical Analysis

Regionally in 2023, the U.S. and Canada led the pack with the highest number of deals and aggregate value, securing 11 deals totaling $948M. Europe followed with 6 deals valued at $379M, demonstrating strong activity in the region. Meanwhile, APAC and the Middle East trailed behind, with APAC closing 3 deals worth $379M and the Middle East securing 2 deals for a total of $219M. This distribution highlights a clear concentration of deal-making in North America and Europe, while emerging markets like APAC and the Middle East saw comparatively lower activity but still significant investments.

Investment Efficiency Index by selected countries

As GenAI continues to transform industries, private equity firms are racing to capture value through strategic investments in space. To measure the effectiveness of these investments, the GenAI PE/VC Investment Efficiency Index compares regional efficiency by factoring in deal volumes relative to GDP per capita in selected countries.

The results, indexed to the USA’s 2016 (N=100) performance, reveal stark contrasts in how different markets are navigating the GenAI investment landscape. From the USA’s early dominance to the emerging potential in Europe, China, and beyond, this index sheds light on where private equity might find the most promising returns.

Some key observations:

o USA Leads but Stabilizes:

The USA starts at the baseline of 100 in 2016, as the index is normalized to this value. Its efficiency sharply increases, peaking in 2020 at around 6761 before declining in the following years, ending at 752. This trend suggests an initial boom in GenAI investments (high deal efficiency), but this level of efficiency starts normalizing as the market matures or competition increases.

o EU27 Steady Growth:

The EU27 region shows a steady increase, reaching its highest efficiency in 2022 at 584. While lower than the USA, it displays consistent growth. This suggests that European investors are gradually becoming more efficient in GenAI, though at a more measured pace compared to the USA.

o China and Israel See Sporadic Growth:

China's data, missing in earlier years, records a huge spike in 2022 (3174), indicating a sudden surge in deal efficiency. Israel shows similar growth, peaking at 1314 in 2020, signaling that these regions may have benefitted from concentrated investment periods or major developments in the GenAI space.

o UK and India Show Consistent Efficiency:

The UK, like the EU27, shows gradual efficiency gains, peaking at 998 in 2022. India, while somewhat inconsistent, rises notably to 646 in 2021 before declining. This indicates increasing, but volatile, investment performance in these regions.

o Korea's Steady Rise:

Korea shows a steady and consistent rise in efficiency, peaking at 569 in 2022. This growth suggests a gradual but effective push toward GenAI investments, without the spikes seen in other regions.

o Singapore:

Data for Singapore is sparse but shows a significant value in 2021 (72). It suggests that while Singapore remains a smaller player in the space, it may be slowly emerging as a relevant hub.

Conclusion

The integration of Generative AI (GenAI) into private equity operations marks a significant evolution in how firms manage investments, portfolios, and market insights. As seen throughout this report, the GenAI market in private equity, valued at $178 million in 2022, is projected to experience rapid growth, reaching $1.1 billion by 2032.

This substantial increase highlights the immense potential for GenAI applications in enhancing deal sourcing, portfolio optimization, and operational efficiencies within portfolio companies. Although the adoption rate varies, with some firms leading the charge, the overall penetration is still developing, leaving room for further expansion.

Regional analysis emphasizes the dominance of the U.S. and Canada, but Europe is showing consistent growth. Emerging markets like China and Israel are also displaying sudden bursts of efficiency, while other regions, including Korea and Singapore, are gradually gaining traction.

The GenAI PE/VC Investment Efficiency Index underscores these geographical disparities, revealing clear opportunities for future investment strategies. Despite barriers such as cost, privacy concerns, and uncertainty in implementation, the continued rise of GenAI-backed investments signals a future where private equity firms are increasingly reliant on AI to sharpen their competitive edge, enhance decision-making, and drive value creation across their portfolios.