Private equity buyers use AI-made product copies to test software deals

In short: Some private equity buyers are asking advisers to use AI to quickly recreate a software product, so they can test how defensible it really is before buying the company.

What's going on

Private equity firms have spent years buying software companies. Now they are worrying that some of those products may be easier to copy than expected, especially with today’s AI tools.

Bain & Company told the Financial Times it has started building rough, AI-generated replicas of software made by companies that are up for sale. These replicas are not meant to be perfect. They are more like a quick mock-up (similar to a cardboard model of a house) that lets a potential buyer click around and see what the product can and cannot do.

Bain’s Rebecca Burack, who leads its global private equity work, said the goal is to understand what is truly “defensible” about a software business. In plain terms, buyers want to know if the value is mainly in the code (the instructions that make the software run) or in other things, like customer relationships, data, brand trust, or how the product fits into a larger workflow.

The Financial Times reports that what began in 2023 as a small internal project is now widely used at Bain. One private equity investor said a Bain-built recreation of an analytics product helped their firm decide to walk away from a deal.

What to watch

If more buyers can cheaply test whether a product is easy to recreate, software company prices could come under pressure, especially for smaller “SaaS” firms (subscription software, like paying monthly for an app). Expect deal checks to focus more on what cannot be quickly copied, such as unique data, long-term contracts, and switching costs (how painful it is for customers to leave).

Source: Financial Times