"I am an AI-optimist. I believe the capabilities of Artificial Intelligence will solve more problems and increase the standard of living of more people than it will disrupt livelihoods or diminish humanity. That said, some of the emerging applications of Artificial Intelligence (e.g., virus development, military applications, and monitoring capabilities) are downright scary."
(Mark Buffington, Managing Partner & CEO, BIP Capital)
Artificial Intelligence (AI) has become a driving force that is reshaping most industries, private capital notwithstanding. While BIP Capital does not 'chase hype' in our investment decisions, we see the value of using AI to enhance efficiency, improve decision-making, and create value. We have built proprietary AI technologies across our portfolio and investment platforms to optimize opportunity sourcing, portfolio management, and outcome analysis—creating competitive advantages for the firm and those we serve.
In a short amount of time, AI has introduced measurable benefits to private capital investment processes for firms that have recognized and harnessed its potential. From opportunity sourcing to portfolio management, AI tools are streamlining workflows and delivering actionable insights across sourcing, investments, and portfolio management.
AI has proven it has nearly unmatched potential to create enduring value and improve the human condition – if and when it is used appropriately. AI systems can process vast amounts of data and produce insights that would be impossible for humans to achieve on their own, at least in a short period of time. Besides speed, these AI tools can enhance the accuracy of analysis and decision-making by processing vast amounts of data quickly and accurately to produce insights that historically have been difficult for humans to detect.
As tools in the toolbelt, BIP Capital employs AI to enhance productivity, accuracy, and decision-making capabilities, always weighing its potential to enhance or detract from the human experience. We engage a consideration framework to give every team member the confidence that they are integrating the power and impact of AI responsibly.
This framework underscores our commitment to leveraging AI responsibly for sustainable growth.
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AI's integration into private capital is inevitable and transformative for founders and investors. For funds, the augmented ability to enhance decision-making, optimize processes, and uncover hidden opportunities offers tremendous upside potential and competitive advantages across the board. No longer 'new,' AI is a vital tool in the toolbelt. Funding trends over the past five years show how much capital has gone into building these tools that now are changing how nearly every sector operates, even as AI itself is still maturing. We expect that, soon, "companies that integrate AI" and "traditional" companies will be one and the same. As funds, founders, advisors, and investors embrace the ubiquity of AI, vigilance and ethical stewardship will ensure its benefits far outweigh the risks.
AI/ML pioneer Andrew Ng has observed that "AI is the new electricity." We are part of what may be the greatest innovation of our lifetime because of its immeasurable potential to augment human capability and achievement. Its potential for disruption (negative and positive) is enormous. It's up to us to harness its potential for good and navigate the challenges it presents. This is not a future-state conversation. By embracing AI ethically and strategically, BIP Capital is unlocking a process of transformative growth and innovation that has yet to reach its full potential.
The following is an edited transcript from the Extraordinary Pursuits podcast discussion about AI between host Rachelle Kuramoto and BIP Capital CEO Mark Buffington.
MB: I think it's changed what people are investing in, and there's kind of a theme or a hype cycle—if you take a negative point of view—a lot of capital rushing in. So you see tons of money on the investment side rushing into AI-themed investments. Just like we saw with social media investments or in healthcare EHR investments over a decade ago, there are always these kinds of hype cycles, and we're certainly seeing that related to AI.
In terms of how private equity or venture capital funds operate, I haven't really seen a huge effect yet. We're trying to apply it to create efficiencies and more accurate decision-making. But there's nothing out there where I could point to one firm or another that's like, "Man, they have created massive differentiation and competitive advantage from their use of AI." I suspect that's coming. We hope to be on the cutting edge of that as well.
As I talk to other practitioners and other peers and colleagues in the private equity and venture space, I haven't seen massive use of AI yet in their operations and decision-making workflows. But I do think it's coming.
MB: There's a lot of noise out there on AI. On one end of the spectrum, there are people who think that AI is going to take all of our jobs, and we're going to be building these advanced AI weapons that, you know, eventually, machines will take over and kill all the humans. That's kind of on the far end of the spectrum. And then I think the other end of the spectrum is that AI is going to solve all the world's problems. As usual, I kind of land in the middle on that. In past publications, we've created a four-quadrant grid. My suspicion is that, in the vast majority of cases, artificial intelligence is going to augment human beings and their activities, make them more efficient, and make them more accurate. And so, it'll improve the human condition, but it'll affect people in the way they work.
Like other technologies, if humans aren't ready to adopt and change the value that they're providing, some humans and their jobs will be left behind. But historically, the economy has done a very good job of recycling that talent into newer positions. It just takes some people a little longer than others to make those adjustments.
I'm more of an optimist on the AI front. I think that it'll probably augment more human beings in their work and also improve the human condition more than it would damage it or just replace humans outright. Now, there are certainly areas where we will have a scenario where it lessens the human condition and also replaces humans at work. It's kind of the double negative. My gut tells me that the net effect of AI will be very positive. That doesn't mean it won't be disruptive and cause some harm. That's almost certain to be the case. It's potentially a double negative, but it could be a positive. And I think as we move forward in time, we'll experience some of both, but probably more on the positive side of the ledger—improving the human condition and augmenting humans in their work.
MB: I just got an email from a law firm that specializes in technology and AI. They were basically prompting the question, "Should every company, and probably especially companies like ours, have an ethical AI policy?" That's probably a good question. Most people should think through what they're willing to leverage the AI tools for and where they would draw a hard line.
You can have all the policies in the world. My experience is that the people who adopt those policies and put them in place are not the ones we need to be worried about. It's possible that the people we need to be worried about are those in government who might use artificial intelligence to create advanced weaponry. Some of the stuff emerging in the development of chemical compounds that are much, much more lethal than even anthrax or other chemicals that have been used in chemical warfare—some of that stuff is really scary. In the hands of the wrong people, whether it's a rogue government or a terrorist organization, it could be really scary stuff. But I don't think an ethical AI policy is going to stop those people from doing those types of things.
In that regard, I think we've got to really think through what the boundaries are. How do you approach AI with thoughtfulness and reason? Not every human being on the planet is thoughtful and reasonable. So, how do you detect those things? How do you prevent these things? No doubt, this tool is more powerful than almost anything we've encountered in human history—maybe other than nuclear weaponry. I don't have the answer for the rogue actors. I think for the rest of us who are trying to improve the human condition, improve the quality of work people do, and improve their effectiveness, the sky's the limit with technology.
It's a time for great optimism. I wish I could tell you how we're going to address and handle the fringe in our society that has an interest in gaining undue control or harming other humans because we know they exist. And what happens with these types of tools in their hands? Almost in all endeavors, I don't know how to deal with people who aren't thoughtful and people who are unreasonable.
MB: That's a great example. If you think about it, on balance, the World Wide Web has created more information and more understanding of other cultures. It makes it easier to travel. I mean, so many things. It puts information in the hands of people. But to your point, there are plenty of people, either on the dark web or even on the World Wide Web, who are using it for nefarious purposes. My suspicion is we'll always deal with that. Some people are wired that way. But the scary part about this is that these tools are much, much more powerful, and they're getting more powerful. We'll see how that unfolds.
MB: I tend to think about it more through the lens of what we're trying to do at BIP Capital, which is that our clients give us capital with the expectation that we'll do the very best we can to generate handsome returns for the risks that they're taking. On a relative basis, private markets create the ability to generate higher returns than one might otherwise do predictably in public markets. And I think if you study this and back good managers over time, the empirical evidence would say private markets afford astute investors the opportunity to do that more often than public markets, mainly because private markets are less efficient than public markets.
If you have that backdrop and then think, "The mandate is to go find really special opportunities or unique opportunities and then drive excess returns—how do you apply artificial intelligence to do that along that spectrum?" One way you can do that is by finding special deals. I've written about this a lot. I'm not a big believer in the ability of one human to consistently outpick other groups of humans. For example, if you lined up a thousand potential high-growth, early-stage companies, I'm not convinced that one could consistently pick the ten that are going to be the huge winners over and over again.
The evidence would suggest that there are not that many great pickers out there. And even if there are, it's like the time you spend trying to find them and identify them. It's easy if all of a sudden you had somebody who's been a great picker for three, four, or five different fund vintages. But, you know, everybody can find that person and wants to get money into their fund. Good luck trying to do that in advance. The real trick is picking the great manager before it's obvious to everybody else that they're a great manager. Said that way, we're not spending a lot of time trying to augment for picking. We are improving our workflow and organizing ourselves better to point our time to things everybody can see, but we're just more efficient.
Once we're in a diligence process, AI can be used to drive tremendous efficiencies and accuracies—that's what we're focused on. There's always, or almost always, a time crunch. You're trying to learn as much as you can in a relatively short period of time to invest in an asset. The ability to gather, synthesize, and assess information is critical. Those who do that well, on average, are going to do better than those who don't in the private capital space.
I see massive applications for AI in that. We're investing heavily in that and are already generating efficiencies. If anything, we are gaining more consistency and depth. AI gives us the ability to process massive amounts of data faster and in real-time and to set up workflows that allow us to do that. Pre-investment and post-investment that's where I see tremendous opportunity. And I don't think I'm alone in that. My guess is that's where the market's moving, and that's the effect it'll have on private capital. We'll see. We're all learning very rapidly about the application of the technology every day.
MB: The advice I would give to founders is contingent on the industry they're in and the dynamics in that industry. We're spending a lot of time upstream thinking through how we invest in valuable pockets of unique data that provide insights into problems that will allow us to play a key role in solving those problems. One has to think very clearly about not just the capabilities of the AI tools out there and how you apply them but also what unique data and positioning you have to effectively build great in-market solutions. Unique raw data can be turned into very valuable information. It's not too dissimilar to the oil industry in that if you drill in the wrong place or you have low-quality oil; it's a lot harder to sell that for premium prices on the market. It's a lot harder to refine it, etc. But if you're in the right oil-rich environment, those folks in the industry who own the raw materials, the actual oil, are the ones who make all the money. It's not the refiners. My guess is, to some extent, that'll be true in the data and AI space.
On the flip side, there are downstream solutions that are going to be extremely valuable as well. That gets into some of my theory about augmenting humans—whether it's at the point of care and they're treating patients or when people are making financial or risk decisions, or what have you. If you can dream it up or if you have a problem, my guess is AI will eventually be applied to it.
MB: I think governments are going to try to control these markets. Historically, that has not gone very well. On the flip side, as I mentioned earlier, there is a risk of rogue actors out there with these super-powerful tools in their hands. We've got to find the right solutions to manage those things.
The question that you didn't ask me is: What is the government's role? What is our role as citizens? How do we educate ourselves so that we're smart on these things?
That's something I would challenge everyone to think through. People need to pay attention. I think they don't quite realize how powerful these tools are becoming and the impact they're going to have on people's lives. It's probably mostly positive, but there will be some negatives. An informed citizenry is always a good defense against abuse. I think that would be my message—something we should continue to talk about as AI develops.
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