Artificial Intelligence Sees Surge in Venture, Growth Investing
Artificial intelligence, which is seen as a transformative technology across a range of industries, is attracting increasing investment in the U.K. and Europe from private-equity firms.
But those firms are often making growth or venture-type investments rather than going for full buyouts, as they put a toe in the market to learn about the technology and the companies behind it while also seeking to minimise their risks.
“It’s harder to do a PE-driven buyout if you’ve never known the industry and those companies before,” said Soheil Mirpour, senior vice president of investments at Rocket Internet SE, a German internet company that develops startup companies. Mr. Mirpour previously worked at U.S. buyout giant KKR & Co.
He said small investments by private-equity firms provide a way to gain familiarity with “what is going on at the grassroots level while also safeguarding their private-equity investments from any AI-related disruption risks on a large scale. Down the line in five to 10 years, private-equity will be all over those AI companies, which will be front-runners for a buyout.”
One such deal was in July, when KKR and Summit Partners were part of a $75 million Series D financing led by New York-based Insight Venture Partners in U.K. cybersecurity firm Darktrace, which uses artificial intelligence tools like machine-learning technology to identify threats to corporate networks. KKR and Summit invested in previous rounds of capital for Darktrace.
Summit’s London-based Managing Director Han Sikkens, who is the lead investor and a board director at Darktrace, pointed to the company’s disruptive technology in a fast-growing cybersecurity sector “which continues to be fuelled by high-profile breaches”.
KKR declined to comment.
U.K. AI capital flows
Another similar deal followed in August when mid-market private-equity firm Livingbridge invested £3.5 million in consulting and managed services firm Symphony Ventures, founded in London in 2014.
The Series A funding is intended to fuel the growth of Symphony’s Robotic Process Automation and Intelligent Automation systems by doubling its employee numbers and expanding its global footprint.
Data from Pitchbook shows private-equity and later-stage growth capital investments in U.K.-based AI companies more than doubled to $676.25 million year-to-date through Oct. 31 from $307.06 million in 2016. Of the total this year, 76% has comprised growth capital and venture capital and 22% private equity.
Varun Sunderraman, a London-based partner at M&A advisory shop Arma Partners, whose clients include private-equity firms in the media, telecom and technology sectors, said moving away from the traditional model of investing in a company and then exiting within three to five years will allow firms to take a more considered look at AI.
“That means private-equity investors can think longer-term and AI is a longer-term value creator. So, when you change your timing horizon and your prerequisite for having profits at the outset, you’ve suddenly removed some of the hurdles that prevented you from investing in AI businesses,” Mr. Sunderraman said.
At the same time, more traditional acquisitions of AI companies are also happening, including by non-U.K. companies.
Austin, Texas-based energy analytics firm DrillingInfo, which is majority-owned by Insight Venture Partners, announced in October that it is acquiring London-based DataGenic.
DataGenic specialises in data-agnostic technologies for energy and industrial clients through a product portfolio that incorporates AI tools, which energy and commodities traders can use to overlay their data for insights into pricing, currencies, shipping instruments, and auctions.
“We’re looking for additional add-on acquisitions that can add next-generation machine-learning capabilities on top of the data we already have. That’s part of our strategy. That’s where you can add value,” said Deven Parekh, a New York-based managing director at Insight Venture Partners.
Another deal was Palo Alto, California-based Canyon Bridge’s purchase of British chip designer Imagination Technologies PLC for £550 million ($742.5 million) in late September after the latter’s fallout with its biggest customer, Apple Inc. Canyon Bridge is backed by Chinese fund Yitai Capital.
Imagination, best known for producing graphics processing units, uses image recognition through machine-learning algorithms, which have allowed high-quality images on Apple’s smartphones and tablets.
“The U.K. will remain a target for smaller-cap private equity players. We’ll see more consolidation. We will ultimately end up with a smaller number of larger businesses,” said PwC’s U.K. artificial intelligence leader Euan Cameron, who helps private-equity and investee clients navigate the AI landscape through their deal-making efforts.
European AI capital flows
European startups have also been attracting private-equity investments. Data from Pitchbook shows private-equity and later-stage growth capital investments in AI companies based in Europe (excluding U.K. and Ireland) reaching $473.02 million year-to-date through Oct. 31, up from $170.70 million in 2016.
France and Austria were particularly popular this year, with AI-based acquisitions, where deal values were publicly disclosed, amounting to $20.7 million in the two countries combined. This is a striking contrast to 2016, which saw zero private equity activity in AI across Austria and France, and less than $7 million of venture capital investments in AI across Germany, Sweden, France and Austria, according to data from research firm Dealogic.
In October, a consortium of investors comprising CM-CIC Investissement SA, Robert Bosch Venture Capital GmbH, SEB Alliance SAS and Innovacom Gestion SAS invested about €6.1 million ($7.2 million) in Robart GmbH, an Austrian developer of AI for consumer and industrial robots.
That same month, pan-European private-equity firm Idinvest Partners SA joined hands with a group of venture capitalist investors including Kurma Partners and Partech Ventures for a $6.4 million investment in Paris-based medical technology enterprise Cardiologs Technologies SAS, which uses AI in an electrocardiography analysis platform.
Cardiologs was Idinvest Partners’ second AI investment in France in less than a month. On Sept. 14, Idinvest led a €6 million financing deal for Influans SAS, a French publisher of open source data management and integration software that provides a cloud-based AI platform.
Philip Erlanger, managing partner, general partner and co-founder of California-based Pontifax AgTech advised private-equity investors eyeing AI investments to manage their risks more efficiently by keeping track of competitors and factoring in the possibility that the pace of acceleration of AI tools such as robotics and machine learning technologies in acquisition targets might be much slower than expected.
“It really amounts to patience and having insights into the particular AI technology at hand in terms of how it is differentiated,” he said.
Pontifax AgTech, which makes later-stage growth capital investments in agricultural technology leaders, held the final close of its Global Food and Technology Fund in October, attracting commitments totalling $105 million after exiting its investment in an AI-based robotic crop management platform, Blue River Technology through a $305 million sale to John Deere in September.
Mr. Erlanger said that the firm now hopes to clinch other new and add-on investments in companies using AI to analyse large data sets across different functions.
Meanwhile, AI is being used to speed up due-diligence processes involved in M&A transactions. KPMG’s Strategic Profitability Insights is one such tool, which the firm says reduces the time taken for M&A due diligence-related transactional data analysis from weeks to hours.
“These AI tools enable dealmakers to open the hood and check how the engine is working to their minutest detail, so that they can decide whether they want to make a bid or not quicker than they could before,” said Mike Mills, a KPMG partner whose clients include Advent, CVC Capital Partners and Hellman & Friedman Private Equity.