AI makes a mess of private equity

It's no secret that AI has become a splitting headache for private equity, or at least for funds that bought big into enterprise software.

• But this isn't just a backward-looking problem, which can be temporarily stemmed by Q1 equity markdowns and maturing debt renegotiations.
• Almost every industry big that spoke to Axios at the Milken Global Conference this week said that AI has created massive modeling challenges for new deals, almost regardless of sector.

Private equity is a long-term asset class, typically holding portfolio companies for a minimum of three or four years.

• For context, it's been only three-and-a-half years since ChatGPT was first released.
• Subsequent AI advancements — including the introductions of Claude, Gemini, etc. — have upended industries.
• Any financial sponsor (or lender) who claims a high degree of confidence in the environment three-and-a-half years from now is either lying or self-deluded. Even if it partners with a major frontier lab.

"Modeling exit multiples has always involved a lot of guesswork, but now it feels like throwing at a dartboard blindfolded," said one private equity veteran.

• The known unknowns are more pronounced, even in industries that appear AI-resistant or more likely to benefit from the tech than be disintermediated by it.

Private equity has plenty of dry powder, with limited partners continuing to invest despite the DPI drought.

• So new investments will obviously be made. Even if the industry's long-term nature, always one of its greatest strengths, is becoming a material weakness.