Private equity (PE) firms are beginning to embrace artificial intelligence to enhance portfolio valuations, a shift expected to increase transparency and improve regulatory compliance. Although fewer than 10% of private funds had integrated AI by mid-2023, Deloitte predicts that up to 25% of PE firms could implement AI for portfolio valuations over the next five to seven years. This advancement aligns with global regulatory trends, including SEC actions to expand private market access to retail investors and increase compliance requirements for private fund advisors. AI-based valuations can help firms meet more frequent reporting demands and address concerns about valuation lag, which contributes to systemic risks like the denominator effect.
AI-driven valuations could also enhance retail investor confidence by providing more frequent and transparent assessments of portfolio holdings. As AI tools incorporate financial and nonfinancial data, they may provide more timely insights, reducing the inefficiencies of quarterly valuations and enabling better decision-making. However, AI adoption introduces risks, including model biases and cybersecurity issues, prompting regulators to closely monitor AI use in financial operations. With industry-leading practices such as customization, transparency, and oversight, PE firms can address these challenges while leveraging AI to improve portfolio management and attract new capital from both institutional and retail investors.
