Almost every PE firm now claims to use AI, but Schroders Capital Company CIO Nils Rode thinks others are asking the wrong question about it.
The firm, which has $112 billion of AUM and is the private markets and alternative investment division of asset manager Schroders, published a white paper in May arguing that the highest value contribution of AI to PE will not come from cost savings or simple teams, but from changing the distribution of returns—finding more winners and avoiding more cancellations.
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Nils Rode, CIO of Schroders Capital
Courtesy of Schroders Capital
The arithmetic behind that argument is clear. According to the paper, which uses a global sample of investments studied over three decades, about one in four acquisition deals yields a total IRR of more than 50% over an average four-year period, while one in ten returns nothing at all. In a supplier-driven asset class, a single winner or an avoidable loss can have a material impact on the fund.
Schroders Capital has developed three proprietary AI tools embedded in its investment process, including a GP screening tool called the Long/Short List, which identifies managers that match patterns associated with unusual historical performance across nearly 1,000 US and European investment managers, as well as two AI agents, GAiiA and Vicky.
PitchBook spoke with Rode about how those tools work, where the industry stands, and why he believes cost-cutting firms are missing the big picture.
This interview is edited for length and clarity.
PitchBook: There is a lot of industry talk about the effectiveness of AI driving. What do you think about the role of AI in private equity?
Nils Rode: We have a strong opinion there. We believe that these tools will make better use of available data, and will lead to an explosion of analysis – good analysis – 100 times more, and at the same time 100 times faster. So things that might take weeks can now be done in hours.
It will be a bit like PowerPoint. When PowerPoint was introduced, it didn’t mean that people made the same presentations at an average rate of 10%, but they made hundreds of thousands of presentations.
So we believe the same will happen in our industry. It will lead to better investments.
PitchBook: How does AI help in better investing?
Go to: As long as you get one great investment or avoid one bad investment in the fund, that changes the performance of the fund. That has a huge impact on the performance of LPs and existing interests, and that impact is much higher than the cost savings anyone can have.
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PitchBook: How is Schroders using AI agents to improve performance?
Go to: We have two great AI agents. The first one is called GAiiA, i.e. Generative AI Investment Analyst. That helps with data room analysis and due diligence. And another agent is called Vicky, Vicky Investment Committee Agent. That he knows all the investments in the past, all the investment memos, but also the results, which were good and bad, and then he asks questions of the opposition to write the investment memo.
The way it goes is that GAiiA can do the first draft of the investment memo, and then Vicky can challenge it, based on the investments we’ve made in the past, these are the risks that may have been overlooked, or that you have to dig deeper. Then [it] returns that response to GAiiA. GAiiA is making a new version of the investment memo.
Vicky, a challenge tool, is to avoid bad investments because it tries to identify all inconsistencies, risks and problems. It reduces the investment decision, because it raises many questions, and this can lead to a better analysis and may lead to the investment not being made, because there are more doubts.
In between, there is always someone who oversees.
The PitchBook: Why is human guidance so important?
Go away: Our strong opinion is that these programs will never have full autonomy, so never have voting rights, never make any decision in the program, but that it will always be about helping people. The people dimension in our business is very important. It is about networks of trust and relationships. Ultimately, companies are run by people, and you need to learn management and culture. There is always a lot of information that is not in the data room.
People still have more of an investment context than a tool. Where the tool is better than people is that I am on the investment committee, and I have a firm for more than 20 years, and I have to know all the 300-plus direct investments we have made, including all the pages of each memo, and all the results of all 300, but of course no one can, but the system can. There are some areas where programs can be better than people. This is where they should focus.
PitchBook: What does it really take to do AI in PE?
Go to: Doing AI well means not using a chatbot; it means applying your philosophy, your criteria, your process, your thinking to investments with the help of AI, and using proprietary data. Not many firms will be successful with that. But for those who do, it will lead to a better investment.
This article originally appeared on PitchBook News
