Investing.com - With Artificial Intelligence (AI) increasingly pervasive in many sectors of activity, more and more experts are delving deeper into the usefulness of AI in the investment world.
James Ellison, Head of Private Asset Data Insights at Schroders (LON:SDR), notes that, "for private asset investors, the true potential of AI is only just beginning to emerge".
"For some industries the immediate impact of AI will be huge. In fact, for some companies, AI is already completely changing the way they operate. In most other sectors, including investment in private markets, we believe that almost all professionals will see an increase in productivity in the next six months. But AI will not completely revolutionise what is already being done," says Ellison.
How will AI be used by private investors?
"Private investors are faced with an enormous amount of information: general partner reports (GPs), company filings, industry documents, news articles and market intelligence. The mass mining of this unstructured information, facilitated by LLMs, is allowing investors to cut through the noise and focus on the most important pieces of information," explains Ellison.
One of the long-standing challenges for private equity investors is to compile a list of "comparables" for valuation purposes, says the Schroders expert. "Traditionally, this has relied on sector classification and geography of the deal to identify an investment's comparables; now, using the content of company websites in conjunction with LLM, it is possible to build a more detailed 'similarity map' than a more representative list. And in record time," he says.
How will investors, fund managers, investment firms and service providers adapt?
As Ellison describes, "organisations poised to lead tomorrow's market are those that can master the engineering challenges of integrating underlying models with internal data. This can quickly educate and train their workforce to use AI to improve productivity and foster a culture of innovation throughout the organisation. In addition, organisations that form strategic partnerships with key technology leaders will gain a significant first-mover advantage, as they will have access to the latest models and the engineering talent behind them. Finally, our experience has shown that technical competencies such as data science have had an amplified business impact when integrated into investment teams; the same will be true for AI."
"In the not-too-distant future, the tools useful to many businesses will be provided by external vendors. Company-specific tools, which can be a source of competitive advantage, will be created in-house. External tools will become the norm for doing business in all companies. The competitive advantage will lie in the in-house tools," he adds.
"By automating routine and repetitive tasks, AI has the potential to significantly increase productivity, freeing human workers to focus on more complex and creative tasks that require human ingenuity," Ellison stresses.
Limitations and challenges
While AI has the potential to revolutionise investment in the private market, it is important to recognise that there are risks associated with its use, Ellison warns.
According to him, there are three broad categories of tasks "not suitable for AI" that require humans to be "in the loop" to make key decisions.
- Critical thinking
- Conflict resolution
- Broad contextual awareness
"A human-centred approach can monitor the AI system and ensure that the outcome is correct and explainable. In addition, it is important to recognise the limitations of the technology: while AI can analyse large amounts of data and identify patterns, it is not a magic bullet and can make mistakes," he says.
"Legal, compliance, privacy and security considerations are a prerequisite, as AI systems must comply with legal regulations and ethical guidelines. Finally, it is crucial to have governance mechanisms in place to evaluate and approve use cases, ensuring that AI is used responsibly. By carefully considering these risks and applying appropriate safeguards, private market investors can harness the power of AI while minimising potential downsides," he concludes.
Translated from Spanish using DeepL