In the fast-paced world of private equity (PE), due diligence (DD) is the cornerstone of successful acquisitions. This process involves dissecting a target company, uncovering its financial health, operational strengths and weaknesses, and potential risks. Traditionally, DD is a time-consuming, resource-intensive, and expensive endeavour. Specialist Legal, Financial and/or Commercial Due Diligence firms are often brought in, deploying teams of consultants to sift through mountains of paperwork.
However, the rise of Artificial Intelligence (AI) is poised to revolutionize DD, potentially reducing the need for extensive manpower, particularly for more junior roles. Imagine a world where AI can scan an entire data room, a virtual repository of a target company's documents, instantly categorizing and mapping its contents. Furthermore, specific AI tools could be built to assist in constructing sophisticated financial models, generating financial forecasts, and even predicting future performance. Potentially a Private Equity partner could simply type the question they want into an interface and AI would produce slides and analysis based on the clients needs.
This isn't entirely science fiction. While AI isn't quite ready to fully automate the process, significant progress is being made across consultancy. McKinsey launched Lilli back in 2023 which contains a database consisting of more than 100,000 proprietary documents, KPMG launched CLARA focused on the audit market.
However, it's crucial to remember that AI is a powerful assistant, not a complete replacement for human expertise. The ability to analyse complex information, fact-check findings, and offer insightful interpretations remains firmly within the human domain.
There are also potential drawbacks to consider. AI algorithms can be susceptible to bias, leading to inaccurate or misleading results. Additionally, existing AI software can sometimes "hallucinate" content, creating non-existent information. Data privacy is another paramount concern. Large language models are currently banned in many companies due to the legal and ethical considerations surrounding data sharing.
Despite these limitations, AI offers immense promise for streamlining DD. While AI excels at processing vast amounts of data, it lacks the human capacity for critical thinking and ethical considerations.
Here's where AI truly shines - as a force multiplier for due diligence consultants. This could fundamentally alter the competitive landscape, allowing senior individual freelancers with the ability to program AI tools and analyze findings to compete more effectively with established firms. PE funds may prioritize consultants who can not only navigate the complexities of DD but also adapt to AI-powered software.
Don't mistake this for the end of large consultancies. Instead, AI empowers them to operate with a leaner structure, dedicating more resources to strategic analysis and value creation. This could also democratize the market. Currently, the reputation of a consultancy often carries significant weight. With the rise of AI, the focus could shift towards the underlying AI software, with consultancies acting as enablers.
The future of DD is one where human expertise and AI capabilities work synergistically. To stay ahead of the curve, PE firms should embrace AI as a tool to enhance their DD processes, while simultaneously recognizing the irreplaceable value that human consultants bring to the table.
