AI Drives Private Equity's Next Competitive Edge

In Brief:

Private equity faces mounting pressure to deliver returns after years of overpriced deals and sluggish exits, forcing firms to fundamentally rethink how they create value in an increasingly competitive landscape. Clark O'Neill, BCG's global lead for AI infrastructure and cyber in the private investors and private equity practice, argues that artificial intelligence has moved beyond theoretical potential to become a practical necessity for differentiated returns. Speaking from the Milken Conference, O'Neill warns that firms clinging to traditional playbooks risk falling behind as AI reshapes everything from deal sourcing to portfolio management, with the smartest investors already using these tools to bend cost curves, accelerate revenue growth, and future-proof their investments.

Big Picture Drivers:

• Returns Crisis: Private equity returns have slowed significantly following 2021-2022's overvalued deals, forcing firms to prove differentiated value creation to raise new funds

• Technology Maturity: AI has transitioned from hype to reality, with practical applications now delivering measurable business impact across portfolio companies

• Competitive Pressure: Firms must develop new capabilities and skill sets to differentiate themselves in an increasingly crowded investment landscape

• Transformation Opportunity: AI represents the next evolution in private equity value creation, following innovations in LBO financing and portfolio management models

Key Themes:

• Focus Over Fragmentation: Successful AI implementation requires concentrating on three transformational initiatives rather than spreading resources across hundreds of proof-of-concept projects

• Productivity Capture: Generating efficiency gains through AI is meaningless unless firms have concrete plans to translate those improvements into P&L impact

• Data Maturity Correlation: Organizations with strong data science capabilities and mature data practices show significantly higher AI readiness and implementation success

• Human Judgment Primacy: AI serves as a powerful tool for processing information and analysis, but cannot replace the gut instincts and relationship assessments that define great investors

Key Insights:

• Revenue acceleration through AI-powered sales tools offers more dramatic value creation than cost reduction, as faster revenue growth directly impacts business multiples and exit valuations for private equity investors.

• Firms are bending cost curves rather than cutting headcount, expecting AI productivity gains to reduce the need for new hires while maintaining current workforce levels.

• Alternative data analysis using AI enables deeper due diligence, allowing investors to validate growth forecasts by analyzing hiring trends, user growth patterns, and job posting data in target companies' ideal customer segments.

• Knowledge management represents the primary entry point for most private equity firms, as AI unlocks institutional wisdom from hundreds of previous deals and market analyses.

• Security protocols and organizational data protection remain unsolved problems in agentic AI environments, creating barriers to scaling even as the underlying technology advances rapidly.

• Adoption challenges exceed technical barriers, with firms systematically underfunding the change management and people transformation required to realize AI's potential value.

Memorable Quotes:

• "Over the next 10 years, investors and private equity firms that drive differentiated returns are going to do so using applied AI." - Clark O'Neill, establishing the stakes for the industry's future

• "When we give productivity to our coders, if we don't have a plan to capture that productivity, their dogs get more productive because they get to go home at 4:30 and get walks." - AI leader at hedge fund, illustrating the dog-walking productivity trap where efficiency gains evaporate without strategic capture plans

• "The organizations that are truly driving impact with AI, they're starting at the what are the three things that are going to fundamentally move the needle on the business at the top level of the organization." - Clark O'Neill, contrasting focused strategy with scattered experimentation

• "You cannot outsource your job and your judgment to ChatGPT. You have to use that as a tool to help you understand and go deeper and make a better decision." - Clark O'Neill, defining the proper balance between human insight and AI capabilities

• "If you've got a hundred percent hit rate, you're probably not leaning in hard enough, and you're not taking enough risk." - Clark O'Neill, advocating for psychological safety in AI experimentation and innovation

The Wrap: 

Private equity stands at an inflection point where AI adoption will separate market leaders from laggards over the next decade. Firms that move beyond scattered pilots to focus on transformational applications—particularly in revenue acceleration and knowledge management—while maintaining the human judgment that defines great investing will capture outsized returns. The window for establishing competitive advantage remains open, but only for investors willing to experiment, accept calculated failures, and invest as heavily in organizational change as in technology infrastructure.