A new strategic imperative in private equity: The AI operating partner
Private equity funds that include operating partners with skilled, strategic AI perspectives at the portfolio level have an immense competitive advantage—those that don’t risk leaving millions of dollars on the table.
by Ryan Bulkoski and Austin Cowan
In the rapidly evolving landscape of artificial intelligence (AI) tools and services, the vast majority of private equity firms, irrespective of industry focus or portfolio scale, are finding AI a current necessity. Portfolio companies that do not act now to acquire AI talent risk, at the very least, missing opportunities for growth—at the worst, obsolescence.
In light of this, expertise in data science and AI at the fund level—historically limited to market intelligence and due diligence—has begun to shift to people in traditional, private equity operating partner roles, with a mandate for portfolio-wide value creation. There has been an enormous spike in the hiring of AI operating partners, and we have seen through our work that funds with robust, strategic AI perspectives at the portfolio level have positioned themselves with an invaluable competitive advantage.
There is not yet a single path for the development of truly strategic AI and machine learning leaders who are capable of working with private equity. Through our work, however, we have identified three verticals where these people exist and from where the transition to private equity can be made seamlessly; we have also identified three key criteria funds should consider when assessing potential leaders.
However, the market is highly competitive. Firms that act quickly to source and attract AI operating partners will have the best chance of securing the long-term strategic success they can enable.
Leveraging AI across private equity: A strategic imperative
Private equity firms have a wealth of opportunities to leverage AI, particularly generative AI, to enhance their operations and drive value creation. In deal sourcing and market analysis, AI can analyze vast data sets to identify potential investment targets and emerging market trends faster than any previous method.
At the operational level, artificial intelligence can enhance portfolio companies’ supply chain management, streamline production processes, and optimize decision-making through predictive analytics. AI-driven customer service and sales enablement tools can be deployed within portfolio companies to personalize customer interactions, predict customer needs, and enhance sales strategies, ultimately driving revenue growth and creating deeper, more tailored customer journeys. The possibilities for transformation are endless.
At the fund level, automated reporting and insights generation can be powered by machine learning, enabling real-time performance tracking, risk assessment, and comprehensive financial analysis, improving transparency, efficiency, and accuracy. Over time, even a 1% uplift in portfolio-wide efficiency can have a dramatic trickle-down effect on the portfolio’s overall value. Despite, at times, having no direct reports or a very small team, the AI operating partner can have an outsized impact on portfolio value.
Given the wide range of applications and benefits, more and more AI operating partners are taking on roles that encompass both strategic and technical responsibilities.
The value of a successful AI operating partner
To be successful in this role, the AI operating partner must have a deep understanding of the available platforms and their applications, enabling him or her to tailor these solutions to the unique needs of each portfolio company.
An AI operating partner will be expected to operate autonomously in most firms, delivering measurable digital transformation results in the form of net-new profitability or top-line margin expansion while also communicating broad AI thought leadership across the firm.
Though an AI operating partner’s impact on a business model or bottom line is black and white, it is also their ability to navigate today’s complex threat matrix that is highly coveted. AI is generating myriad risks for private equity firms and their portfolio businesses, including data privacy and security issues and challenges surrounding intellectual property protection, model hallucinations, and model accuracy. Ensuring regulatory compliance for both the firm and its portfolio companies is also paramount, and the AI operating partner can provide counsel on these matters.
In addition to the specific business benefits and risk mitigation today, given the rapid advancement of AI-enabled technology, we believe PE firms that do not have an AI operating partner will miss the opportunity to adapt smoothly and consistently across the firm and its diverse businesses, hamstringing value creation for years to come.
Finding the potential in a competitive talent market
Firms have rapidly entered the market for operational AI perspectives, understanding that the intersection of strategic exposure to private equity and technical expertise in AI is rare.
PE firms most often seek experienced operating partners or executives who have meaningful experience working with PE at the fund level in AI-specific roles. When people with that expertise aren’t available, firms have found people with strong, relevant experience in highly technical, Tier 1 consultancies with dedicated AI labs. These candidates possess the strategic and highly technical skill sets that AI operating partners will need. Some firms have also found very strong candidates in centralized AI labs within multi-product, multinational financial services providers that offer horizonal data science and machine learning services to business units in intense, data-driven operating environments.
In each of these three candidate pools, firms will find executives who have the gravitas, strategic capability, urgency, and business sense to engage PE investment professionals. They will also find leaders who are deeply technical and capable of engaging engineering, product, and IT stakeholders in portfolio companies. Securing the buy-in of both groups will be imperative for the AI operating partner in leading portfolio-wide transformation.
To successfully assess potential AI operating partners, funds must consider the following key criteria:
- Recent hands-on experience applying cutting-edge machine learning, deep learning, neural networks, and related technologies in businesses relevant to the firm’s investment theses.
- Demonstrated ability to communicate at executive and boardroom levels, engage stakeholders, and translate strategic digital and machine learning opportunities to meet core business needs.
- Strong technical aptitude and understanding of available and emerging third-party solutions.
Firms that position the role of AI operating partner as a truly strategic, operational thought partner immediately distinguish their role from others in the market. In addition, attractions such as carry in the firm’s existing fund and the ability to work across the entire portfolio are viewed as must-haves for top talent.
Firms that do not hire in this initial wave may well find themselves looking to candidates with no experience in private equity—as an operator, client, or in a financial services environment with similar rigor. Though these candidates will likely have strong technical depth, the transition to the strategic level in private equity will be a difficult one for both the executive and the firm.
Looking ahead
As AI becomes embedded in every company, leaders with AI expertise are becoming strategic assets capable of driving significant value creation. In the competitive landscape of PE, being an early adopter of AI across the portfolio can provide a significant advantage for firms and portfolio companies alike. By hiring an AI operating partner, private equity firms can harness AI’s full potential across their portfolios.
About the authors
Ryan Bulkoski (rbulkoski@heidrick.com is a partner in Heidrick & Struggles’ San Francisco office and global head of Artificial Intelligence, Data & Analytics Practice within the Frontier Tech Practice.
Austin Cowan (acowan@heidrick.com) is an engagement manager in the San Francisco office and a member of the Artificial Intelligence, Data & Analytics and Cybersecurity practices within the Frontier Tech Practice.