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Navigating the AI Landscape: 5 Considerations for Private Equity Buy-Side Transactions

As AI reshapes industries, PE groups engaged in buy-side transactions must carefully approach AI-enabled businesses.
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In the dynamic landscape of business, artificial intelligence (AI) has become a transformative force, prompting businesses to leverage its capabilities and strategies into their day-to-day operations. Current statistics show that 35% of businesses have already adopted an AI strategy, and 83% of businesses believe that adopting AI will grant them a competitive edge in the current market. 1 As private equity (PE) groups progress with acquisitions in this evolving landscape, the integration of AI strategies in target companies poses unique challenges and new opportunities for growth. With target companies continuing to embrace AI technologies, it is imperative PE groups on the buy-side of transactions focus on evaluating five critical considerations.

1. Comprehensive AI Due Diligence

The foremost consideration for PE groups is to conduct a comprehensive AI due diligence over the targeted companies. This involves a deep dive into AI capabilities, technologies, and applications. Understanding the quality of AI algorithms is essential, along with identifying the data used for training and the overall AI strategy employed by the business. This is where any potential legal or ethical issues related to copyright or intellectual property infringement, data integrity, data privacy, bias, or regulatory compliance can be identified, which is integral to mitigating risks associated with AI implementations.

2. Cybersecurity & Data Privacy

As previously noted, an increase in the adoption of AI in businesses comes with increased cybersecurity and data privacy risks. AI relies on vast amounts of sensitive data. This may include proprietary algorithms, customer information, intellectual property, and other confidential business data. Robust cybersecurity measures are essential in the prevention of unauthorized access, data breaches, and potential theft of sensitive information that could compromise the competitive advantage that the target companies maintain. PE groups should consider this, as well as identify any existing vulnerabilities or historical breaches and assess the ability to remedy such issues.

3. Scalability & Integration

AI tools are only effective if they can scale with the growth of the business. As PE groups invest with the expectation of future growth, companies’ AI strategies must be able to handle increased quantities of data, interactions from users, and operational complexities without requiring a proportional increase in resources. PE groups must also consider if the AI strategies adopted by the target business align with its current operational needs and if it could lead to implementation risks during the post-acquisition phase.

4. Ethical Artificial Intelligence Practices

AI continues to face increased scrutiny as it grows in its influence over the current economic landscape. Adopting ethical AI practices is not just a matter of corporate responsibility but also a strategic imperative. It is essential for PE groups to evaluate the fairness and transparency of AI algorithms, along with addressing bias issues and ensuring that the AI strategies align with societal norms and regulations. These ethical AI practices are essential not only for brand reputation but for long-term sustainability as well.

5. Regulatory Compliance & Risk Management

The dynamic nature of AI technology often outpaces the implementation of regulatory frameworks. PE groups must first evaluate the target companies’ adherence to existing regulations and continuously assess potential future regulatory risks. Global data protection regulations impose stringent requirements on how businesses collect, process, and implement personal data. Failure to comply with these regulations can result in reputational and financial damages, which necessitates the existence of a robust risk management framework specific to AI implementation to have the tools necessary to navigate regulatory uncertainty.

With AI continuing to reshape industries across the world, PE groups engaged in buy-side transactions must approach AI-enabled businesses with a discerning eye. At Forvis Mazars, we emphasize the importance of comprehensive due diligence when dealing with companies adopting AI strategies as this new, evolving technology brings many benefits to organizational productivity and data management capabilities as well as many uncertainties. By prioritizing the considerations of AI-focused due diligence, cybersecurity and data privacy, scalability, ethicality, and regulatory compliance, PE groups can increase their likelihood of mitigating risks and position themselves for success in a rapidly evolving, technologically-dominated business landscape.

If you have any questions or need help navigating the AI landscape, reach out to a professional at Forvis Mazars.

  • 1“How Many Companies Use AI 2023: AI Usage Statistics & More,” May 16, 2023.

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