Investing and Accounting Firms Turn to AI-guided Dealmaking to Gain Edge over Rivals

Venture capital funds, private equity groups, and accountancy firms have embraced the latest advancements in artificial intelligence (AI) to identify lucrative acquisition targets and high-potential start-ups. This strategic move is driven by the belief that leveraging AI technology can provide a competitive advantage in the fast-paced world of dealmaking.

Prominent players in the industry, such as KPMG, Coatue, and Headline, have incorporated cutting-edge AI tools into their operations, effectively advising clients and streamlining their decision-making processes.

Given the current market climate, where initial public offerings are limited, dealmakers face mounting pressure to identify the next high-growth start-up. In response to this challenge, some experts argue that employing generative AI for tasks like assessing a company’s growth potential through financial analysis can be highly beneficial.

Accounting firms such as KPMG use AI-powered character-recognition tools and forecasting platforms, to streamline data processing, improve forecasting accuracy, and gain valuable insights from complex datasets and qualified finance professionals play pivotal roles in navigating the impact of AI on investment decisions asthese professionals utilize specialist accounting software and AI-powered tools.

Pär Edin, leader of innovation in KPMG’s US deal advisory and strategy business, emphasized the advantages of being an early adopter. “If you can train or use a model that attains high efficiency first, you will gain a competitive edge that is hard for competitors to replicate. It’s about being the first mover in each specific use case,” Edin explained.

The rapid development of AI technology over the past six months, triggered in part by the release of OpenAI’s widely popular ChatGPT, has spurred investors to leverage these tools for identifying fast-growing companies and attractive acquisition targets.

For instance, KPMG has harnessed the technology behind ChatGPT to develop an AI system based on its proprietary data, effectively assisting its staff in making informed decisions. The firm reported that the tool gained significant traction during its month-long implementation, crediting recent AI advancements for its practical usefulness, particularly in mergers and acquisitions (M&A).

Coatue, on the other hand, has integrated generative AI into its data platforms through its software called Coatue Brain. This innovative approach enables the software to sift through extensive sell-side research, earnings transcripts, and pitch decks, extracting and condensing key points into clear and concise briefings.

Another notable example is PitchBook’s AI-driven “VC exit predictor,” which evaluates the likelihood of a company going public or being acquired. The data provider asserts an impressive accuracy rate of 75% for this two-month-old tool.

Moreover, venture capital firms Headline and Moonfire Ventures have employed generative AI to assess and compare investment targets, focusing on metrics like web traffic and new users to identify companies with significant growth potential. By doing so, these firms can narrow their focus to a manageable number of companies, facilitating more informed decision-making. Headline has even attributed investments in businesses like password management service Bitwarden to the recommendations made by their AI systems.

Despite the increased adoption of AI in investment strategies, questions have emerged regarding the role of human relationships and judgment in the sector. Industry analyst group Gartner has projected that AI and data analytics will inform over three-quarters of venture capital and early-stage investments by 2025, sparking discussions on potential implications for traditional investment practices.

Mathias Schilling, a founding partner at Headline, reassured that AI does not threaten the traditional role of venture capitalists. Instead, he highlighted that AI acts as a co-pilot, augmenting their capabilities and enhancing their interactions with companies.

London-based Moonfire, which reviews approximately 50,000 companies every week using AI, has sought to address concerns of algorithmic bias by establishing rules that prevent AI from considering certain attributes, such as gender, when evaluating founders of companies. This effort aims to ensure fairness and promote inclusivity in their investment decisions.

However, Anne Glover, CEO of venture capital firm Amadeus Capital Partners, expressed reservations about generative AI, suggesting that the tools tend to exhibit bias due to their reliance on limited and historical data. Glover emphasized the need to exercise caution, asserting that critical human decisions should not be solely based on AI-generated insights, especially in cutting-edge investment scenarios where specific criteria may not be well-defined.

In an industry where the pursuit of innovative investment opportunities is paramount, the integration of AI technologies offers promising potential. Nonetheless, ongoing discussions surrounding fairness, bias mitigation, and the optimal balance between human judgment and AI-driven insights will shape the future landscape of dealmaking and investment strategies.