AI Investment: The Dealmaker’s Dilemma
After a significant sell-off in tech last year, 2023 has seen a rebound in both private and public markets. Particularly across private markets, interest in AI is driving a material part of this activity resurgence. For many investors, there’s developed a mounting pressure to be an early mover in the space.
This month, OpenAI is set to start selling employee shares at a valuation of $86 billion. The timing is fortuitous for the buyside, as we’ve recently seen the reopening of the IPO market promising near-term liquidity.
AI’s potential returns, combined with favorable market conditions, have created an intriguing proposition for many. The private market demand we see signals that, without question, AI is the next categorical investment strategy.
Demand Dynamics
Over the past two years, private market investors, primarily those with mandates for secondaries, have shifted towards a more pragmatic approach and centralized their portfolios. Where we once saw demand in hundreds of private companies, the breadth of interest has compressed to a handful of high-quality companies.
While this has begun to correct and we’re tracking a steady return of buy-side volume, there’s been an exaggerated influx of bids on AI companies, signaling strong investor appetite and a willingness to take risks on the new sector.
From our data, we’ve seen significant demand for OpenAI, Cohere and Anthropic. What’s more, AI is attracting buyers across all categories – from institutional investors right through to family offices and ultra-high-net-worth individuals.
As is typical of private and public equities, AI is following the natural ‘hype curve’ for especially attractive or cutting-edge companies. We’re in the initial hype phase of the investment curve now, and price seems to be no object for investors who experience FOMO. As demonstrated by the chart below, bids and offers alike are commanding top dollar with lofty implied valuations.
Clearly, investors are clamoring to get in, and the pool of buyers is vast. This presents an incredible opportunity for highly skilled secondary dealmakers.
Raising the stakes: Deal Complexity
Private securities trading restrictions are vastly more complicated due to existing ownership structures. Add to this amplified due diligence needs and pricing opacity, and dealmakers have their work cut out for them.
Take for instance, OpenAI; Microsoft’s ownership of the company has a myriad of implications on the legal complexities brokers must navigate, and often necessitate customized vehicle structures such as SPVs to successfully complete trades.
Additionally, AI companies currently leading the category lack a cohort of public comps, which means data and market understanding is similarly lacking. Limited access to information results in due diligence difficulties and pricing inconsistencies. The same will be true of new AI companies entering the market; making access to research, understanding of legal frameworks, and data tracking critical for those hoping to help facilitate transactions, and provide a personalized experience to clients.
In many cases, the ability to rely on an established team with strong industry relationships and infrastructure for due diligence will be necessary to get deals across the finish line.
---
With investor demand broadening and deepening, coupled with a reopening IPO window, secondary brokers face prime market conditions to capitalize on massive upside. However, the uniquely challenging dynamics of transacting within AI companies will require a robust infrastructure to get deals done.
Two things are for certain. First, AI is the hottest investment category since the tech boom. Second, there’s nothing straightforward about getting AI deals done.
If you’re interested in learning more about the capabilities of Rainmaker’s continued investment in our platform for dealmakers and broker-advantageous business model, get in touch.