Analysis

K E Y N O T E

I N T E R V I E W

AI drives transformational
technology shift

Advances in artificial intelligence offer new use cases and productivity
gains, opening up opportunities for late-stage companies,
say Wellington Management’s Rob Mazzoni and Matt Witheiler

Q

How are privatecompanies advancing AI
today?

Rob Mazzoni: We’ve observed significant activity among AI start-ups building infrastructure, models and applications, as well as traditional software
companies incorporating AI technology to better serve customers. Where
we’re more cautious is around the heftycapital flowing into the space, with AI
companies raising capital at big multiples, and plenty of copycat businesses
getting funded.
Periods of investor and founder
exuberance often fuel innovation, andwe’re spending time with incredible

30

Private Equity International•

SPONSORWELLINGTON MANAGEMENT
teams gaining real traction in areas likeAI for cybersecurity, software development and legal technology, among
other sectors. We feel fortunate to focus on later-stage investing, where we
can wait for leaders to emerge before
investing, then help companies alongthat ‘last mile’ of their journey towards
becoming public companies. Many AI
companies will likely prove to be features versus platforms or lose to public incumbents, but we believe several
huge companies will emerge.

September 2024

QHow are AI developments
impacting investment
theses, in terms of where value
is being accrued between techincumbents and start-ups?

RM: We’re thinking deeply about
where AI will be an enabler or disruptor. AI appears to be unlocking opportunities in sectors that were previously
untouched by technology because they
were too services-heavy, such as law
firms and customer support. It’s also
now possible to challenge entrenchedbusinesses: maybe AI can do the workof a sales development rep, but alsobuild a modern, automated customer
relationship management system.

Analysis
We debate where value will accrue, both among various sectors, andbetween incumbents and start-ups.
When it comes to AI, incumbents
seem to have data and distribution advantages. Big public companies haveamassed data over decades to build
and train AI technology, and they havehundreds of millions of customers todistribute it to.
Like in the mobile era – when Google and Apple had massive advantages,
but entirely new use cases emerged in
the cases of Uber and Airbnb – the AIwave could see huge public companies
sprout from modest start-up roots.

so they now have maybe only 12-18
months left of cash.
At the same time, valuations and valuation expectations appear to be down.
When you consider that competition
seems to have thinned out, it could
create an interesting environment.
This might be especially true given thebackdrop of technology-led disruption,
which seems to be continuing at an accelerated pace with technologies suchas AI. Finally, if you look at the publicmarkets where many of these companies aspire to be, those markets appear
to have stabilised and deal activity is up
there.

Q

What does AI mean forvalue-creation strategies
and where will jobs be mostimpacted?

Q

RM: AI has the potential to be a massive accelerant to growth and productivity, maybe even more so than themicrochip, PC and internet. There will
likely be dislocation – we might see
companies replacing large customer
service staffs with AI that understands
all prior customer interactions and never sleeps – but particularly for knowledge workers, AI should make thembetter at their jobs.
What’s impossible to predict is how
exactly things will unfold. AI may unlock new jobs to be done, and humans
will adapt to fill them. Historically,
waves of technology-led disruption
have created more opportunities thanthey removed, and my guess is the AI
wave will follow suit.

MW: The IPO market is beginningto open back up. Last year there were
three technology venture-backed IPOs
and this year we saw five or six in thefirst half, so the pace has accelerated.
If we look at the last 50 years, on average the IPO window has been below
historic norms for one to three years at
a time – that is typically how long thewindow closes, when issuance volumes
come down. We have seen volumes
down in 2022, 2023 and now 2024,
so we are in the third year. Late-stage
private companies are actively planning for IPOs, which was not the casea year ago.
Those delayed IPOs are likely creating investment opportunities because
companies are raising private money. Meanwhile, as IPO activity comes
back, it could provide a benefit to ourpart of the market from a liquidity perspective.

Q

Looking more broadly,
how would you describe
the current market environment
for tech investors?

Matt Witheiler: On the late-stage private side, today’s market environment
feels unique and potentially quite favourable. Deal activity is up as morecompanies are raising money. Manylate-stage private companies last raised
capital in 2020 or 2021, but there is often a constant need for more money,

What does the IPO market
look like today, and howis that impacting late-stage
growth strategies?

Q

What are the biggest
headwinds facing tech
investors right now?

MW: We are still digesting the hangover from 2021 activity levels. Thereis no lack of innovative companies,
but the impediment is that many don’t
need to raise money yet. Still, as every

quarter passes, a new company may
find itself needing capital to do something.
RM: We have seen a clear bifurcationin the market, where there is a large
class of companies that raised capitalin 2021 and early 2022 that have foundthat – in a new market environment
where perhaps capital preservation isbeing valued more than growth – they
have cut cash burn but also cut growth,leaving them in a challenging position.
They are not of a scale that is interesting to public markets, and they are also
not growing fast enough.
On the other hand, there are companies that have persistent attractive
attributes, which are continuing togrow quickly, but are overvalued. AI
valuations seem especially frothy. Tech
investors are willing to pay premium
multiples for businesses that are truly
best in class, but the challenge is to discern which those are and where there
will be desirable growth.

Q

Where will the most
exciting opportunities bein the next 12 months?

MW: We are opportunistic; the benefitof working at a $1.2 trillion asset manager is that we have investors with deep
expertise in every sector, so we can gowherever we see the best risk/rewards.
The consumer sector has been interesting. It suffered during covid,
especially experience-based businesses, and has since seen acceleration. In
software where many companies thatraised money in 2021, we are now seeing them come back to market.
Finally, AI is a particularly interesting opportunity. There was a lot of
exuberance around digital currencies
in 2019, but at the time that felt a bitirrational. With AI, we are believers
that this is a transformational technology shift. nRob Mazzoni is technology sector lead andMatt Witheiler is consumer and technology
sector lead for Wellington Management’s
Private Investing platform

September 2024

• Advanced Technologies & AI

31