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AI and private equity fund performance
Finance professor Florencio Lopez de Silanes is a member of the Finance & Accounting Insights on Risk & Regulation (FAIRR) research centre at SKEMA Business School. He also serves as the associate dean for academic strategy. In June 2023, he co-authored a research paper examining the interactions between AI and the performance of private equity funds in the SSRN (Social Science Research Network) journal.
Private equity (PE) has become an important component of investment portfolios across the globe. PE fund manager selection is one of, if not the, most important yet challenging decisions that investors in the PE asset class need to take. Historically, investors have relied on their experience and available quantitative information about the past success of the fund to tackle the challenge of fund manager selection within PE.
Surprisingly, the finding shows that PE fund performance is unrelated to quantitative information, such as prior performance, and measures of document readability. Meanwhile, AI tools can use qualitative information to predict future fund performance: the performance spread between the funds within the top and bottom terciles of predicted probability of success is about 25%.
These results show that Artificial Intelligence can help pick out top-performing PE funds better than many institutional investors. These findings support the view that in opaque and non-standardised markets, such as private equity, investors fail to incorporate qualitative information in their asset manager selection process.
