Private Equity's AI Transformation Dilemma
The Need to Prioritize Transformations for your Professional Services Portcos
In 2021, private equity’s average deal size pierced through the $1 billion mark for the first time ever in what appeared to be the beginning of yet another golden age. Prices were soaring, markets were hungry, and the cost of debt was near zero. But as time progressed, PE slid into one of the worst downturns in the industry’s history. PE bankruptcies have soared since 2022 and continue at record levels (e.g Spirit Airlines and First Brands in Q3 2025). Although tariffs have clear responsibility in many of this year’s downfalls, the recent adjustments of investments into tariff-insensitive essential services threatens the future of many of their existing portfolio companies. The real oversight is PE’s lack of a thoughtful playbook to lead existing professional services portcos in AI agent transformation. Without successful transformations, PE risks its longstanding reputation in leading digital innovation and positions AI-first competitors to capture that value, only accelerating the bankruptcy trend.
A recent Harvard Business School working paper provides data-backed evidence that “private equity investors function as strategic capital allocators, adjusting their investment approaches in response to technological shifts”. Yet, in EY’s Q3 PE Pulse report, allocations to healthcare, a sector with notoriously strict AI safety standards and regulations, more than doubled year to date. This trend is not unique to Q3, but is instead a thematic pivot of 2025 overall. In reaction to tariff uncertainty, PE has focused latest investments into essential services (e.g. healthcare, utilities, infrastructure), many of which are human labor intensive, physical asset driven, and highly regulated. Because of this, the occupations that underlie these services rank at the very bottom of exposure to agentic AI. Despite strategic reorientation towards traditionally safer industries, PE is also rapidly gaining a track record of failures within these sectors as research by S&P Global found these sectors responsible for 56% percent of H1 2025 bankruptcies.
As essential services have become the primary focus, technical leaders within PE have felt side-lined as a result. Many of PE’s digital leaders neither see the opportunity to usher in agentic transformation to these new investments nor have been issued a clear mandate to guide AI transformation within the existing portfolio. As a result, many leaders are departing to start their own AI-first companies. Moreover, these positions frequently go unfilled, with Bespoke Partners recently reporting that demand for C-suite and VP-level digital leadership in the second half of 2025 significantly exceeds available supply. Without playbooks, and losing leaders, the options are quickly waning.
Meanwhile in big tech, the race towards deploying AI agents continues to gain momentum. Current solutions are already fulfilling the promise of human-like intelligence with major players like IBM automating 94% of their routine HR tasks and confirming mass layoffs as a direct result. This leaves tech-enabled portfolio companies increasingly anxious of the growing AI-first innovation in both startups and big tech. Portcos in professional services such as insurance, legal services, and HR are most exposed. These sectors spend ~50% of revenue on knowledge workers, the exact roles agents are well positioned to automate. Under this immense pressure of exposure and lacking AI leadership, these companies attempt their own internal AI agent transformation initiatives. Unfortunately, most lack specialized AI engineering talent and their internal teams are already lean, stretched thin on managing existing systems. Pair these shortcoming with the now infamous report from MIT, and the odds for success average well below 5%.
This is creating a strategic inflection point, with the wrong choice ending in the demise of PE’s reputation as leaders of digital transformation and accelerating bankruptcies in their most exposed portcos. By continuing to lack transformation playbooks, failing to retain top AI leadership, and filling their latest funds with less exposed sectors, they risk undermining the digital leadership LPs expect from them. The choice is clear: adapt now to harness agentic AI, or risk further losses and conceding reputation to a new wave of agile, AI-first competitors.
About Rosenblatt
MIT reports that partnering externally on AI-first products brings them live six months sooner and twice as successfully as internal builds. Rosenblatt specializes in AI agent transformation for mid-market, tech-enabled, professional services. We bring together AI leaders from big 4 consulting firms and exited AI startups to lead teams from agent pilots to full production-deployed agents. Click below to schedule a 30-minute portfolio AI exposure assessment with our founder.