The AI-Driven Turn in Private Equity: Why Operational Reinvention Is the New M&A

The private equity (PE) landscape in 2025 is undergoing a quiet revolution. As traditional M&A strategies face headwinds from slow returns, integration risks, and geopolitical uncertainty, leading firms are pivoting toward AI-driven operational reinvention—a shift that promises to redefine value creation in the years ahead. This article explores why disciplined PE firms are now prioritizing AI as a core tool for boosting exits and long-term growth, and why investors should pay close attention to this strategic pivot.

The Decline of M&A as the Default Playbook

M&A has long been the cornerstone of PE value creation, but its limitations are becoming increasingly evident. Deals often face prolonged regulatory scrutiny (e.g., the FTC's delayed approval of Arthur J. Gallagher's $13.45B acquisition), while integration risks and cultural mismatches can erode returns. Even when successful, M&A-driven growth often requires years to materialize—time many firms can no longer afford in a fast-evolving market.

Meanwhile, geopolitical tensions and supply chain disruptions have added new layers of complexity to cross-border deals. The backlog of unsold portfolio companies—now numbering over 30,500—further underscores the need for alternatives to the traditional M&A cycle.

AI as the New Engine of Value Creation

Enter operational reinvention powered by AI, which offers PE firms a path to faster, more scalable growth. By embedding AI into portfolio companies' operations, managers can:
1. Automate and Optimize — Reduce costs by up to 70% in areas like due diligence, customer service, and supply chain management.
2. Enhance Decision-Making — Use predictive analytics to identify undervalued assets, forecast risks, and refine investment theses.
3. Drive Top-Line Growth — Leverage AI to personalize customer experiences, improve product innovation, and expand market reach.

Example: Brookfield Asset Management's use of AI in its infrastructure portfolio (e.g., Enercare and HomeServe) has cut repair call times by 15–20%, while boosting sales and retention by 25%. This is operational efficiency at scale—a stark contrast to the unpredictable returns of M&A.

Sectors Leading the Charge

The shift to AI-driven reinvention is most pronounced in sectors with high operational complexity and long-term demand tailwinds:

1. Digital Infrastructure
2. Over $100B has flowed into data centers since 2023, fueled by AI's voracious appetite for compute power.

4. Firms like BlackRock and Microsoft are partnering with sovereign wealth funds to build AI-ready infrastructure, unlocking value beyond traditional asset management.

5. Healthcare and Consumer Goods

6. AI is streamlining supply chains and enabling product innovation. For instance, Flowers Foods' acquisition of Simple Mills leveraged AI to optimize distribution networks and target health-conscious consumers.

7. Energy and Renewables

8. PE-backed energy firms are using AI to manage power grids and optimize renewable energy outputs, aligning with global decarbonization goals.

Implementation Hurdles—and Why They're Manageable

Adopting AI isn't without challenges. Firms must invest in talent (data scientists, AI engineers) and technology infrastructure, which can strain budgets. Regulatory concerns around data privacy and algorithmic bias also loom large.

Yet the payoff is clear: firms like Carlyle and KKR are already raising hybrid credit funds (e.g., Warburg Pincus's $4B structured-investing fund) to finance AI adoption. Meanwhile, secondary markets and continuation funds are providing liquidity for underperforming portfolios, freeing capital for strategic reinvestment.

Investment Implications: Where to Look

The strategic pivot to AI creates opportunities for investors in two key areas:

1. PE-Backed Companies with Proven AI Adoption
2. Target firms in sectors like data centers, healthcare tech, and renewable energy that are already using AI to cut costs or boost margins.

3. Example: Consider positions in companies like Mowi ASA (aquaculture) or Trucordia (logistics), which have demonstrated AI-driven operational improvements.

4. PE Firms Leading the AI Transition

5. Funds like Brookfield, KKR, and Blackstone—already ahead in AI integration—are likely to outperform peers in the next downturn. Their ability to generate returns through operational excellence, rather than M&A, reduces dependency on external market conditions.

Conclusion: The Future Belongs to the Disciplined

The decline of M&A as the default strategy and the rise of AI-driven reinvention mark a turning point for private equity. Firms that embed AI into their operational DNA will not only navigate current challenges but also position themselves to capitalize on the $3–4% annual growth in global AI infrastructure spending.

For investors, this is a buy signal for companies and funds that are ahead of the curve. While implementation hurdles exist, the long-term rewards—faster exits, sustainable margins, and resilience to macro shocks—make this shift a compelling bet for patient capital.

The era of M&A as the primary growth lever is ending. The future belongs to those who reinvent operations with intelligence.

This analysis assumes the continuation of current market conditions and regulatory environments. Past performance does not guarantee future results.