Interim CIO: Dr. Claus Michael Sattler
AI due diligence
The 10 worst pain points for a private equity firm during AI due diligence
In the rapidly evolving world of artificial intelligence (AI), private equity firms face unique challenges when it comes to acquiring and valuing companies with AI technologies. AI due diligence is a critical process that provides deep insights into the technological maturity and potential of a target company. Here are the ten most serious issues that private equity firms face in this process.
1. lack of transparency of the AI algorithms
One of the most common problems that private equity firms discover during AI due diligence is the lack of transparency of the AI algorithms used. Many companies treat their AI models as “black boxes”, which makes it difficult to assess their effectiveness and reliability. This can lead to uncertainties regarding the long-term performance and scalability of AI solutions [source: 1].
2. inadequate data strategy and quality
Another critical pain point is the often inadequate data strategy and quality in the target company. During AI due diligence, private equity firms often find that the data used to train the AI models is incomplete, distorted or of poor quality. This can affect the reliability and accuracy of the AI systems and lead to incorrect decisions [source: 3].
3. lack of AI governance and ethical guidelines
Private equity firms often discover during AI due diligence that the target company lacks clear AI governance structures and ethical guidelines. This can lead to reputational risks and legal issues, especially given the increasing regulatory requirements for AI systems [source: 3].
4. inadequate technical infrastructure
A common pain point is an outdated or inadequate technical infrastructure for the development and implementation of AI solutions. AI due diligence often reveals that existing systems are not able to keep pace with the requirements of modern AI technologies. The necessary investments in modern AI infrastructure can be significant [source: 2].
5. lack of qualified AI specialists
An often underestimated pain point is the lack of qualified specialists in the field of AI and machine learning. During AI due diligence, private equity firms often find that the target company does not have the necessary talent to effectively develop and scale AI projects. Recruiting and retaining AI experts can be a significant challenge [source: 4].
6 Legal and regulatory risks
AI due diligence often uncovers significant legal and regulatory risks. Many companies struggle to keep up with ever-changing AI regulations, especially in light of the EU’s upcoming AI Act. Failure to comply with these regulations can lead to significant penalties and reputational damage [source: 3].
7. unclear intellectual property rights
Another pain point that private equity companies identify during AI due diligence is unclear ownership rights to the AI systems and algorithms. This can be particularly problematic when using open source components or cooperating with external partners. Unclear IP rights can significantly affect the value of AI assets [source: 3].
8. lack of integration of AI in business processes
AI due diligence often reveals that companies have difficulties effectively integrating their AI solutions into existing business processes. Many AI projects remain isolated pilot projects without creating measurable added value for the company as a whole. This can call into question the profitability and scalability of AI investments [source: 2].
9. security risks and vulnerabilities
A critical pain point is the often inadequate security of AI systems. During AI due diligence, private equity companies often discover that the target company’s AI solutions are vulnerable to attacks such as adversarial examples or data poisoning. These vulnerabilities can not only lead to data breaches, but also jeopardize the integrity and reliability of the AI systems [source: 5].
10. difficulties in evaluating the ROI of AI initiatives
Finally, assessing the return on investment (ROI) of AI initiatives is a significant challenge. During AI due diligence, private equity firms often find it difficult to quantify the actual and potential value of AI projects. This makes it difficult to decide which initiatives should be continued, expanded or discontinued [source: 4].
Conclusion: The importance of thorough AI due diligence
The pain points listed illustrate how important thorough AI due diligence is for private equity companies. It not only helps to uncover potential risks and hidden costs, but also provides valuable insights for the post-acquisition strategy and long-term value creation [source: 1].
Effective AI due diligence requires a holistic approach that takes into account technical, operational and strategic aspects of AI use. Private equity firms should rely on experienced AI experts who are able to penetrate the complex technological landscapes of modern AI companies and make precise assessments [source: 1].
To address these pain points, private equity companies can consider the following steps:
- Development of a clear AI strategy and governance structure for the target company
- Investment in modern AI technologies and infrastructure
- Building a team of qualified AI experts and data scientists
- Implementation of robust data protection and compliance measures
- Development of strategies for the effective integration of AI into business processes
- Establishing metrics to measure the ROI of AI initiatives
- Carrying out regular safety audits of the AI systems
Ultimately, thorough AI due diligence can make the difference between a successful investment and a costly failure. In an increasingly AI-driven business world, understanding and properly assessing a target company’s AI capabilities is no longer optional, but a critical success factor for private equity firms [source: 2].
By anticipating and addressing the pain points described here, private equity companies can optimize their due diligence processes and make informed investment decisions. This enables them to minimize risks, identify hidden value and ultimately achieve higher returns for their investors.
AI due diligence may be complex and challenging, but it is an essential tool in the arsenal of any successful private equity firm. In a world where AI increasingly determines the success or failure of companies, it is the key to unlocking hidden value and ensuring sustainable investment success in the age of artificial intelligence [source: 5].
Sources
- https://niologic.de/loesungen/anwendungsfall/ki-due-diligence/
- https://www.nexumai.de/en/blog/ki-revolutioniert-m-a-und-private-equity
- https://www.noerr.com/de/-/media/files/web/insights/briefing-ki-und-ma_de.pdf?rev=555a54aca83646ebba96ba5f3edec33a&hash=F678B0D3786E39FFE9EA9B5E9BD312A7
- https://www.vc-magazin.de/blog/2024/11/13/herausforderungen-und-perspektiven-fuer-die-zukunft/
- https://www.pkf-wms.de/artikel/kuenstliche-intelligenz-bei-ma-transaktionen-auswirkungen-auf-den-due-diligence-prozess
- https://www.lw.com/de/people/admin/upload/SiteAttachments/MuA-202310-interaktives.pdf
- https://ma-review.de/artikel/advertorial-der-transformative-einfluss-von-ki-auf-das-m-a-dealmaking-steigerung-der-effizienz-und-generieren-von-opportunities
- https://www.nortonrosefulbright.com/de-de/news/be358ce2/kunstliche-intelligenz-im-fokus-von-ma-transaktionen
- https://www.taylorwessing.com/de/insights-and-events/insights/2024/07/ki-beim-zielunternehmen-in-m-und-a-transaktionen
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Dr. Claus Michael Sattler
