Will AI Replace VPs?
Was recently speaking to a senior investment professional and his take was AI would replace VPs first because it will allow Associates take on more of the VP role, and they are cheaper/don't have carry. "They can manage CFOs and diligence if they don't have model all day". Personally think this is backwards thinking and Associates are incapable of taking that on without years of experience. Also would argue VPs play a critical buffer role between senior folks and the sausage making.
I do think it may put pressure on VP comp and slow promotion trajectories, as well as slow new hiring.
What do others think? Should we be downplaying how much we can accomplish with AI?
The difference between VP and ASO cash comp is a rounding error to funds especially when you take into account that there's generally more ASOs than VPs which would make cutting either group a wash from a normalized expense standpoint (exl. carry calcs for now). It makes 0 sense that they would cut the VPs in favor of less experienced ASOs over a few points of carry IMO. What the VPs take is a de minimis % of the pie but what you're getting is someone who has gone through the reps and can actually quarterback processes. Just "having AI" does not mean an ASO can produce the same work product or make the quality decisions of a VP, and the counterfactual would be the AI allows the VP to more easily automate the ASO's work and free up time more important workstreams.
Ultimately I don't think AI "replaces" any investment roles in PE entirely. There still needs to be a hierarchy and the time-based learning across levels, and to build an enduring franchise you still have to train people up from those lower levels to eventually takeover. IMO what it probably does is make teams at larger shops much leaner e.g. instead of 10 ASOs and 4 VPs it condenses down to say 3-5 ASOs and 1-2 VPs. For smaller shops who already have limited headcounts, it probably increases their # capacity to look at deals/makes it easier to get more done and spreads out timelines for when they do decide to hire.
That all makes sense but your last part still implies a 50% RIF, which would mean half of us are gone and the remaining half are in a substantially weaker bargaining position (while also likely being busier than ever). Still pretty bad.
I mean it is what it is. The industry will become more "exclusive" in terms of # of seats and grant less bargaining power to anyone that isn't bringing tangible value, is easily replaced, or can't play the political game/be well liked by seniors enough to vouche for them. Can you make the case that's not how it should be? Nobody has a "right" to the job unless it's their firm or there's a contract in place. It honestly doesn't sound that different from today, aside from the fact it would just be X times harder to get in in the first place and Y times harder to stay. Flip side is comp likely gets better for those who do stick around and make the cut.
Nice try "VP in PE - LBOs"
Try reading it again analyst, not in PE (anymore) :P
ChatGPT had me killed and is operating this account.
My guess is more VP, less associates - basically diamond shaped instead of triangle shaped. I've been on a couple deals recently where the associate only did comps and a couple slides and I and a junior VP did the rest by ourselves.
You had a junior VP running the model rather than the associate?
I know of two MM funds that are heavily investing in AI with a view to kill the typical Associate class size by ~80%.
That seems like overkill. What are they doing with VPs? Is VP the new Associate?
Both are LMM roll-up focused firms. I have limited information so far, but this was shared with me by people I know personally at each firm. Broadly, the intent seems to be for VPs to remain focused on sourcing and execution. The associates who are retained would shift toward more “prompt engineering” and BDR-type responsibilities, while still staying involved in the broader deal process so they can continue to develop and potentially progress over time.
If everyone is behind deployment targets, wouldn't that be a mitigant that should protect jobs? Keep your team and do more thematic work, bid more IOIs, chase smaller add ons, etc.
Did PowerPoint kill white collar work? Did excel kill the VP? Have lawyers been replaced yet? Or even accountants for that matter? As long as the answer is no then nothing will really happen.
Cmon we both know power point and excel are different from ai.
Lawyers and accountants are having these exact same conversations. The way we do work will change.
Brother presentations used to be made with pen and paper - or in fact plastic cut outs glued onto paper. Research used to be done in an actual library. Etc etc. Does a consulting team or banking team look that different than 30 years ago? Actually not really.
And as a side note, the computer, then the internet, then PowerPoint and excel etc. are by far the biggest inventions of the last 40 years.
It will make teams leaner and give more operating leverage. You always want a pipeline of people moving up in heirarchy. That is why the comments on Analyst roles going away are absurd.
No. As AI takes over some things, humans will be free to do more of other things. Google "1950s accounting floor" to take a look at the army of people that used to be tied up doing calculations.....now one excel spreadsheet replaces them all....and accounting firms still employ armies of people.
AI isn't intelligent, it's just a probability algorithm, it cannot understand anything. It will take a very long time for actual intelligence to be a thing.
Regardless of AI, a lot of small funds are staffed that way - only associates and partners. Associates can do all the deal management, a lot of the basic to moderate legal work (especially if there is a precedent) and partners can flex down and negotiate the more material economic points and legal provisions. You don’t need “experienced” VPs - you need cheap disposable labor (associates). Anyone who thinks VPs are somehow super sophisticated and bring to the table critical experience ( 2-3 years as an associate, 2 years doing nothing in MBA, and 1-3 years actually doing the VP role) and not redundant with associates on project management and principals / partners on docs and lenders lacks any self awareness. You don’t need big teams and you certainly don’t need mid levels to do deals.
Firms with cheap partners (a lot of them) will more than happily do whatever they can - whether it’s working associates more or using AI - to avoid giving away carry and diluting themselves.
I think it’s replacing associates. Frankly the quality of research is much higher, turnaround is faster, and it’s easier to tell when AI gives a bullshit answer. Financial modeling will be solved at some point too but we have proprietary and structurally mispriced deal flow so nothing hinges on decimals anyway
AI is clearly better than the average associate and I don’t need to interview over weeks to find a good one only to lose them. It’s really hard identifying and hiring superstars especially when so many just want to do the lame MF route capping their own growth and upside.
You still need VPs because you need to train them up as deal makers, but my personal view is the AI tool savvy investment professional will take over soon.
Nimble firms that care about returns will reorganize into much stronger and smaller teams around this, paying up for talent that can adapt. The big MFs have a different business model and will plod along milking their fees as usual
Why do you need to “train them up as deal makers”? A lot of firms have partners in their late 40s / 50s who can keep at it for another 20 years. Why would they want to dilute themselves at this time? The only reason maybe to have some institutional pipeline of talent is if you’re going to sell a GP stake, and at that point just start hiring lateral principals 2-3 years in advance.
If associates didn’t have to model because of AI, they could easily take over a lot of the project management function and legal functions of VPs without materially diluting the carry pool and at a fraction of the cost.
We’re in growth mode. Differentiated niche strategy with more capacity and returns that should be structurally great for awhile
If anything, not enough grey hairs at the top yet. Hiring laterals possible too but too many grew up mostly on sellside auctions and don’t really have the knack for real deal making and negotiation. Requires being nimble and creativity and resourcefulness.
There are probably 20+ hedge funds in NY alone that have $10-50 billion in AUM but 25 investment professionals. Soroban, Darsana, Altimeter, Third Point, more Im probably missing, but all (on the public Hf side of their house) have very few IPs and most are mid level or senior.
The way it works at these places (I am at a similar place) is that one or, at most two, guys originate the investment, do all the DD, formulate the investment thesis, build the model, and convince the PM to buy while advising on sizing. And then monitor the investment and advise on when to sell etc.
Because of (1) all the legal / process work involved in buying a company, which is non standardized as opposed to buying a stock/bond/standardized security and (2) private company numbers are a mess and PE guys like to go into a lot of detail on those numbers to which we in public mkt don’t have access to.
(1) seems like easy to reduce work with AI. Claude just came out w something today that can automate maybe 25% of mindless process work already. (2) AI will greatly simplify. We have clean numbers, estimates, expert interviews on publics all neatly laid out in Bloomberg along with fully functioning (but badly formatted) models to download. There is no reason AI can’t recreate this for every private transaction and make the now slow Excel/Outlook/data room work flow completely snappy as it is in public mkts.
All that said there is huge component of interpersonal relationships in PE that won’t go away. But that’s mostly for guys at my level over on the private side, not the worry of most associates or VPs.
As for how industry will shake up…PE firms don’t really compete on price / fees for LPs. Yes there is fee compression but top managers with top returns can wrangle high fees. And outside PE funds trying to list publicly or sell GP interest to a margin focused buyer, there isn’t an incentive to boost margins at the GP for a few extra million a year. But that being said my view is PE funds will slowly have the organizational feel of top single manager Hedge funds. Small group of IPs, everyone senior level or high mid level. No one cycle hiring. At strong shop team stays together for years/decades. This ultimately means far fewer jobs in the industry but much higher pay for those who get to the top / do well in time.
Do you work at a hedge fund? This post makes sense but seems a bit detached from reality of working with middle market companies. Reality is a lot more of a mess than your operating assumptions here. I think having AI helps but doesn't fully solve the "last mile issue" that is the reality of middle market PE.
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