An AI as a VC, Investing in Two Unicorns - Is the Primary Market About to Be Completely Disrupted by AI?

[baoshi.rao]

Is the primary market about to be completely disrupted by AI?

Finding projects no longer relies on investment managers—AI can take over.

Recently, I read an article about how Swedish PE giant EQT uses AI for investments.

The article mentions that EQT has achieved remarkable success in uncovering underwater projects using AI, having completed 15 deals, two of which are valued at over $1 billion, reaching unicorn status, and one has already been acquired.

Uncovering underwater projects is not an easy task for any investment institution. This established European private equity firm has managed to do it with AI. Isn't this clearly taking away the jobs of investment managers? The primary market, which traditionally relied on personal connections and information asymmetry to make money, is now being completely disrupted by AI so quickly?

What's the matter? I went to investigate carefully.

First, let me briefly introduce EQT. This institution is not well-known in China, but it is considered a top-tier private equity firm in Europe.

EQT is a private equity investment institution established in 1994 by Sweden's Investor AB. Investor AB is the largest industrial holding company in Northern Europe, owning several Fortune 500 companies including ABB and Ericsson, with investment focus on unlisted companies in the US, Nordic countries, and Asia. Its founding family is the Wallenberg family, often referred to as the "uncrowned kings of Sweden," which has passed down leadership through six generations and is as renowned as America's Rockefeller and Morgan families.

Notably, Joe Tsai, Alibaba's co-founder, previously worked at Investor AB. In 1999, while serving as the Greater China executive at Investor AB, Tsai visited Hangzhou to evaluate Jack Ma's startup project. He then made the bold decision to resign from his $700,000-per-year job and joined Ma's grassroots team as CFO for a monthly salary of just 500 yuan.

EQT's major investors include Investor AB (银瑞达), New York City Retirement Funds, Texas Teachers Retirement System, and Danske Bank A/S Teachers Pension Fund. In 2019, EQT successfully went public, becoming the first listed private equity firm in Europe. By the end of the third quarter of 2023, EQT's FAUM (Fee-Earning Assets Under Management) reached a staggering €128 billion (approximately ¥1,000.9 billion).

Despite EQT managing 'old money', its approach is remarkably cutting-edge.

Long before ChatGPT became a sensation, EQT had already started using AI to source deals. In 2016, EQT internally developed an AI-driven system named Motherbrain, which identifies potential projects through data analysis. As mentioned at the beginning of the article, the AI has performed impressively, completing 15 deals and producing 2 unicorns.

For instance, EQT's lead investment in AnyDesk's $7.6 million funding round in May 2018 was a project identified by AI.

AnyDesk is a German startup that develops remote desktop control software. Though small in scale, the company has achieved positive cash flow and had no prior engagement with capital markets or active pursuit of external financing. This relatively obscure project was detected by EQT's AI monitoring system, which subsequently recommended it to the investment team.

Motherbrain was able to identify AnyDesk because this AI system has been continuously accumulating data since its inception, tracking millions of companies. The monitoring covers multiple dimensions including financing activities, financial news, website and application rankings, and social network activities. Whenever a company meets EQT's investment criteria, Motherbrain promptly identifies it and generates a prioritized candidate list: suggesting which companies the fund should focus on currently. AnyDesk's outstanding performance across various data metrics naturally led to its selection by the AI system.

Beyond "finding projects," Motherbrain has now permeated all processes within EQT and is utilized by investment teams across 23 global offices. Motherbrain plays three primary roles at EQT:

1. Internal organizational management, similar to systems like Feishu or OA platforms.

2. Acting as an investment analyst. By gathering information from all business areas and using predictive indicators, it identifies risks or opportunities, assisting investment teams in market monitoring.

The third aspect is post-investment management. EQT enables its portfolio companies to utilize Motherbrain, which assists them in recruitment, monitoring competitors, identifying new market trends, and also helps EQT find suitable acquisition opportunities.

EQT is a PE firm with strong technological DNA. Many of EQT's partners are not from investment backgrounds but are executives from European tech companies. Motherbrain is highly valued within EQT, with dedicated investment data experts responsible for data correlation, maintenance, and evaluation to ensure the AI system's accuracy.

It appears that a group of tech professionals has entered the scene to 'revolutionize' the investment industry—such stories are common in the world.

EQT is not the only institution leveraging AI for investments; many hedge funds and investment banks have also begun embracing AI.

Hedge fund giant Bridgewater will launch an AI-driven fund in July 2024, using machine learning to replicate every stage of the investment process. Bridgewater stated that AI can more efficiently process and analyze vast amounts of information, understand market trends, predict future investment opportunities, and ultimately make more precise investment decisions.

While the vision of "letting AI permeate every stage of investment" still faces challenges at this stage, "replacing interns" should not be a problem.

Top investment bank Morgan Stanley has launched a generative AI assistant called AI @ Morgan Stanley Assistant, which functions like a ChatGPT for financial advisors, helping them parse vast amounts of research and data. In the future, it will be available to 16,000 advisors.

Similarly, Citi Bank is also experimenting with AI for content generation, including code generation for technical staff and marketing material creation for sales teams. Currently, various business units at Citi Bank—whether in private banking, wealth management, technology and operations, or institutional business—are actively embracing AI to delegate previously manual tasks to AI.

Beyond aiding in operational tasks, AI can also assist large financial institutions—characterized by their vast scale, complex operations, and numerous personnel—in managing investors, enabling these 'smart individuals' to collaborate more efficiently.

The world's largest listed hedge fund, Man Group, which manages $161.2 billion (approximately ¥1.1529 trillion) in assets, has established a new team focused on generative AI. The goal is to develop and implement generative AI across the company to revolutionize how investors previously worked. In addition to common AI-assisted functions such as improving internal dialogue efficiency, code generation, and document search and creation, Man Group ultimately aims to create an 'alpha assistant' that can directly generate investment strategies based on specific instructions input by the team.

整套故事看完，我们还得辩证地谈谈结论。

从投资、金融机构对AI的热情可以看出，AI在金融圈已经展现出了财富效应。尤其是对冲基金，可以通过海量数据，分析得出更精准的判断，这都基于股票是标准化产品，可以被量化。

However, the primary market is a non-standardized market, and many processes require human involvement, which AI cannot achieve. For example, investors need to meet with entrepreneurs in the early stages to obtain first-hand non-public data or persuade them to secure shares. Additionally, early-stage investments often lack definitive financial data, and incomplete data may lead to incorrect AI analysis, requiring investors to make final judgments based on past experience.

Although AI is playing an increasingly significant role, there has been no fundamental change—AI can identify opportunities but cannot establish connections. Addressing this point, an EQT partner candidly stated, "The role of Motherbrain is to tell us when and with whom we should establish relationships."

AI到底起多大作用，只有EQT自己知道；AI将来能起多大作用，没人知道。但好消息是，钱是真的赚到了。