Top 3 Private Equity Trends in 2024

Trends that will shape 2024

There are many tendencies that we have reason to expect to rise or accelerate this year. However, many of them can be summarized under three main themes that will shape the future of private equity – machine learning, virtualization, and ESG.

Machine learning

What it means for private equity

In the last decade, we have seen an extreme proliferation of public web data sources. It’s natural to expect the next decade to be all about advancing data analysis technology. Machine learning is part of artificial intelligence science that studies the way algorithms can learn to solve new problems without additional programming by humans. Private equity firms use machine learning to evaluate buy-out opportunities in the due diligence process and discover new firms ready for the next big investment. The ability of algorithms to develop their problem-solving abilities by constantly working on the data ensures machine learning a crucial part in the foreseeable future of private equity.

Advantages of machine learning

PE firms use machine learning as it highly improves the efficiency of the analysis. Automated data-handling procedures are generally much faster. Add to that the ability of the tools to improve themselves as they are being used, and you’ll get a whole new level of efficiency. Additionally, machine learning reduces the likelihood of errors as there is no human bias or weariness involved. This leads to cost efficiency, as programming-related operations are excluded and costly errors avoided.

Challenges in machine learning

As all the technical challenges keep being met, the main opposition facing the beneficial implementation of machine learning is the human bias against technology. Some mistrust and unwillingness to accept technological advancements still persist in PE firms. Therefore, those who see the benefits of machine learning will need to take it upon themselves to find a way to reach and educate their colleagues about its importance to ensure that their company keeps up with the pace of the industry.

Virtualization and remote work

What it means for private equity

As COVID-19 hit, many industries had to implement remote work strategies rapidly. This increased the rate of virtualization of various private equity procedures. More and more meetings, decisions, and deals are happening online. Even after the pandemic, remote work and virtualization will keep playing an important part in private equity firms’ daily operations as once implemented. These strategies provide considerable benefits.

Advantages of remote work 

Continuing through 2024 and beyond, virtualization of the workflow will help to remove the barriers set by geographical distance. It also reduces unnecessary bureaucracy as moving towards remote work, we learn to recognize which procedures or documentations are nonessential and superfluous. Naturally, all that leads to improved efficiency for the PE firms.

Challenges of virtualization

Still, at the end of the day, additional trust that comes from shaking a partner’s hand or visiting the location to be invested in cannot be easily replicated. Therefore, in the year after COVID-19, one of the main challenges will be striking the right balance between remote and in-person. Deciding on what is to be relocated to the virtual world and what stays in the physical will require a thorough examination of PE firms and portfolio companies’ procedures.

Environmental, social, and governance investing

What it means for private equity

Evaluating the effects of investing in the broader social and environmental context has been a major theme throughout the 21st century so far. It’s expected that the significance of this theme will only grow when climate change and virus outbreaks make it evident how interdependent economics, nature, and politics are. Environmental, social, and governance investing refer to this need to consider what the long-term effects of such investments will be. Going forward, PE firms will increasingly examine portfolio companies by their business qualities as well as their impact on society and the environment.

Some advantages 

There is a reason why ESG investing is also called sustainable investing. It refers to the stability of societal structures in which investments are being made and business is conducted. In return, investors are helping to create such an environment and are more assured of the future, and can forecast the future with higher reliability. This leads to better-informed decisions and overall higher control over the future for investors.

Challenges

Making sure that the investments conform to the high standards of ESG investing requires a very nuanced analysis of various possible outcomes. This means that private equity firms will have to handle a lot of different types of data to evaluate the investments on many levels. This goes to reaffirm the status of machine learning as a private equity trend for 2024 as data analysis technology will have to be kept up to date.

Data to train algorithms

As we can see, big data analysis will remain a key theme in 2024 and beyond, as its significance has been increasing over the past decade. In one way or another, it will impact most of the private equity trends. Therefore, it is worth looking closer at the role that data plays in machine learning and its algorithm training.

The important thing to understand is that well-trained algorithms don’t just improve efficiency by doing the analysis faster. They can actually do more than it’s feasible by constant programming. One way to look at it is through an analogy with driving. One can’t teach driving by simply explaining what to do. Maybe how to start the car, but not much more. This must be learned by experience.

Similarly, it is hardly possible to program the solutions to every problem that might arise during data analysis. But algorithms can find those solutions on their own when they keep learning by encountering various types of data. Data to the machines is what experience is to the people.

When constantly dealing with data, machines can arrive at solutions that people would likely overlook without human interference. This is why it is crucial to keep feeding the algorithms with various data types, including traditional financial information and public web data. Thus, data-intensive machine learning methods, where algorithms are heavily exposed to online data, have shown strong results in many fields, including financial modeling and marketing.

Therefore, the trends in 2024 will dictate the continuous need for PE firms to get their hands on as much data as possible.

Summary 

Periods after serious calamities are always intense and exciting at the same time. These are the times to rebuild and lay the foundations for a better future. The year 2024 marks the beginning of such a period, as we are continuing with our lives after COVID-19.

And as always, the new life that we will create will depend on where we invest. Judging by the foreseeable trends of private equity, we want to build a more sustainable future, and we are willing to use all available means for that. Machine learning will headlight the set of means for investing that will rebuild the economy in the coming years.