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Why Private Equity Is Pouring Billions into AI Startups – And What It Means for Portfolios, Carried Interest, and Valuations
By Darya White                                                                                                                           July 28, 2025

It’s not just venture capitalists crowding into AI anymore. Private equity firms – long seen as the stewards of predictable cash flows and mature operating models – are now writing bigger and faster checks into AI startups and machine learning platforms. These aren’t small side bets either. Some of the largest middle-market and mega-funds are doubling down on AI-native businesses as part of their core growth strategies.

So, what’s behind the surge? What risks are being absorbed? And what does it all mean for PE portfolios and valuations?

Let’s unpack it.

From Cash Flow to Code: A Shift in PE Appetite

AI used to be a buzzword. Now it’s a business model – and one that’s scaling fast.

Private equity investors are taking notice and putting capital to work in areas like:

  • AI-powered enterprise SaaS

  • Machine learning infrastructure

  • Applied AI in healthcare, logistics, and cybersecurity

  • AI-driven customer and operational automation

 

What’s changed?

  • Revenue visibility has improved for many AI-first platforms

  • Unit economics are becoming more favorable with scale

  • Strategic buyers are eyeing AI capabilities for inorganic growth

  • Data advantages are now a durable competitive moat – something PE loves

It’s Not Just About Growth – It’s About Portfolio Relevance

For LPs and PE fund managers alike, AI isn’t just a shiny object. It’s a strategic hedge against obsolescence.

AI is reshaping business models in nearly every sector. PE firms investing in legacy manufacturing, business services, or retail must now ask:

"How vulnerable is this portfolio company to AI disruption – and how do we future-proof it?"

 

That’s pushing some GPs to:

  • Acquire AI-native bolt-ons for traditional companies

  • Build AI capabilities in-house within portfolio operations teams

  • Allocate to vertical AI platforms that can be applied across their portfolio

 

In other words, AI is no longer a silo – it’s becoming a layer across the portfolio.

Risks PE Firms Are Taking On

This shift isn’t without its tradeoffs. AI investments carry their own set of risks:

  • Valuation volatility: AI companies often trade at lofty multiples that don’t align with historical PE benchmarks

  • Exit uncertainty: Buyers of AI companies are still limited – especially for younger platforms without consistent cash flow

  • Talent dependency: Many AI companies are built around small, specialized teams. Turnover can materially alter the value proposition

  • Tech stack complexity: Diligence on proprietary algorithms and data models requires a different toolkit than traditional operations review

 

For PE firms known for buy-and-build in stable industries, this requires a retooling of diligence, governance, and underwriting assumptions.

Valuation Challenges in AI-Heavy Portfolios

AI-heavy companies – and increasingly, AI-enhanced portfolios – are forcing a rethink of how we approach valuation, especially when:

  • GP interests are tied to performance-based hurdles

  • Portfolios include AI-native platforms with binary upside (huge win or total miss)

  • Estate or gifting strategies are being deployed pre-exit, often at a very early stage of the fund, where future exit outcomes are uncertain

 

Valuation professionals are being asked to quantify future optionality, first-mover advantages, and AI-driven operating leverage – all of which challenge traditional cash-flow-based frameworks.

Valuation Implications to Consider

When fund interests include binary-upside AI companies:

  • Valuation requires more scenario analysis and probability-weighted models

  • There may be a wide valuation range depending on how likely the AI asset is to scale

  • Discount rates might increase based on additional company-specific risks

  • Discounts for lack of liquidity or marketability might increase due to uncertainty

 

This also makes GP carry calculations and financial reporting exercises more sensitive to assumptions. These considerations do require a nuanced approach that blends tech-forward insight with traditional valuation discipline.

Where This Might Be Heading

We’re likely to see:

  • More hybrid AI/infra funds launched by traditional PE managers

  • Increased demand for AI-savvy operating partners and advisors

  • LPs asking sharper questions about exposure to tech risk vs. tech upside

  • Greater scrutiny on how GP carry is impacted by AI-driven performance variance

 

Final Thoughts

Private equity’s pivot toward AI is less about chasing trends and more about staying relevant in an economy that’s changing fast.

Yes, there’s hype. Yes, there’s risk. But there’s also growing recognition that tomorrow’s portfolio winners may look nothing like yesterday’s cash-flow machines.

That shift is already reshaping capital allocation – and will increasingly reshape how we approach valuation, carry waterfall structures, and long-term planning. It’s an exciting time in the investing world. But we should be prepared to see traditional approaches challenged and frameworks restructured.

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