How AI is impacting deal sourcing

00:03 – Katie: Welcome to GrowthTV. I'm Katie Maloney. I'm joined today by Marc Chase, national private equity industry leader for Baker Tilly. Marc joins me to talk about how artificial intelligence is transforming deal sourcing. Marc, welcome back to GrowthTV.

Marc: So good to be with you.

00:18 – Katie: Let's talk about artificial intelligence (AI). What changes are you seeing to deal sourcing as a result of AI?

00:30 – Marc: I think that what we're seeing currently is really kind of bifurcated into the funnel. So, at the top of the funnel, where you're looking at the industry thesis, maybe a sector in that industry, and getting data from that, maybe from public sources, industry journals, and public data of publicly traded companies that are proxy for private. And then honing that down to a screening process of now, let's look at key criteria in that industry that we want to evaluate as a potential investor.

I think the next part of that is using predictive analytics. Now, being in private markets, data on private companies isn't readily available as it is in public markets, but there are proxies that you can use. So, if you see employee growth (ex, they were at 100 employees, now they're at 150 and 200). And you look at the public proxy that says revenue per employee is typically this per this industry. You can kind of have a proxy for what the revenue would potentially be for that company, and then use predictive analytics to kind of project out what that company's value is going to be.

And then through that screening process, evaluate whether that's a candidate firm that you want to go after, and then the priority of how you want to go after that candidate firm. The next logical part of that is using AI tools to start the outreach process.

So you've gone through that whole cadence of market, segment, individual company candidates that you want to look at acquisition, and now you have the outreach. So how do you do it? And can you use AI tools?

The answer is you can—to make those overtures, and you could even do it in the tone of the company's voice, of the private equity firm's voice as the outreach to the potential candidate firm. So, I think that is what's radically changing the environment for sourcing deals.

02:14 – Katie: Are there concrete steps that deal makers can take to better integrate AI into their processes?

02:21 – Marc: Yes. This is such a dynamic and changing market, though.

Putting anyone, even as learned and smart as the people we work with in the private equity space are, giving them all the tools without all the knowledge on how to utilize those tools or what to utilize them for. And the efficacy of each tool on the work streams that you're trying to solve for is kind of folly.

You want someone to walk you through who is designated in the digital space to walk you through kind of from an end point of, “What do you want to achieve?” Then, here are the different potential opportunities for you to leverage AI to achieve that ultimate goal.

There are so many different facets of the workstream that you could put an AI tool in. Going in and saying, “I want them all,” isn't the smartest choice.

03:38 – Katie: What kind of businesses are you seeing being acquired as companies look to integrate AI?

03:44 – Marc: I think we saw the first round of AI, it was data analytics firms. So, really, getting your arms around your own data and then using that kind of tool and knowledge to go out into the marketplace and analyze data of other potential firms. I think that's the first kind of precipice of how we've seen acquisitions done.

Now we're looking at the natural language processing firms. We're looking at firms that are data scientists that create the algorithms that AI utilizes to source data, synthesize data, and come up with conclusions on data. I think those kind of three firms broadly are what are most attractive right now.

There are some facets of AI that are really good at ringing out the human part of the deal sourcing and through the whole continuum that we're talking about; that is the bias.

Now any good private equity person has had their fair share of bad deals. And knowing that you've had that experience to be unbiased when another opportunity in that industry comes along and kind of shade yourself from being influential in that decision-making process because you have a prior bias.

I think AI helps solve for some of that and makes it a dispassionate fact-based data point in which to make it a decision, which I think is beneficial.

The other side of it, it takes the human characteristic out of it. Right? So there is the other side of the whole bias, which AI doesn't particularly solve for right now. It's a fascinating environment. This is the internet 10x. Uh, there's rumor that in 2025, 80% of all deals sourced in private equity will have some AI component to it.

Which is a year away. For AI to go from something that we talked about three or four years ago to something that now is utilized in deal sourcing, potentially for 80% of deals next year, is truly fascinating.