Key facts
- Private equity firms are increasing their scrutiny of AI in professional services deals.
- AI due diligence is now a standard part of accountancy and consulting transactions.
- Investors are examining AI tools, data usage, output reliability, and governance.
- Many companies lack centralized records of AI systems in use.
- Regulators are examining companies for overstating AI capabilities and reliability.
- The SEC has charged investment advisers for misleading statements about AI use.
Private equity firms are intensifying their due diligence on artificial intelligence within professional services deals, particularly in accountancy and consulting. Investors are now a matter of course evaluating AI tools, the data they utilize, the reliability and auditability of their outputs, and the governance surrounding their deployment. This focus stems from the potential for AI failures to materially impact enterprise value.
Many companies struggle to confidently answer questions about their AI usage, leading to legal, operational, and valuation concerns during the deal process. Difficult questions revolve around employees uploading confidential information into public generative AI platforms, the use of proprietary code in third-party systems, and whether customer-facing decisions are influenced by unverified AI outputs. Management may also overstate AI capabilities or fail to consider intellectual property risks associated with generative AI.
A significant challenge is the absence of centralized records detailing which AI systems are in use, on what terms, and what data has passed through them. This lack of documentation shifts AI diligence from a records review to an exercise heavily reliant on management representations, raising questions about appropriate contractual protections when these representations cannot be independently verified.
Regulators are also increasing their focus on AI. In March 2024, the SEC settled charges against two investment advisers for misleading statements about their AI use, a practice then-Chair Gary Gensler termed 'AI washing.' The FTC has similarly warned businesses that AI-related claims must adhere to existing consumer protection standards and launched 'Operation AI Comply' to target companies that overpromise AI capabilities. Sponsors are advised to assess targets' compliance postures, identify regulatory gaps, and estimate remediation costs, especially for AI systems classified as high-risk under laws like the EU AI Act.