The evolution of AI will not be short-lived and hasn’t yet peaked despite bubble fears, according to Alicia Gregory, a managing director at Blue Owl Capital and former deputy CIO at the Future Fund.

“I hear a lot about this AI ‘bubble’… but what I would say is I see a number of reasons why AI is maybe in the fourth or fifth innings and not the ninth innings,” Gregory told the Investment Magazine Fiduciary Investors Symposium

“These next stages are  really, really important, and the way you’re probably going to get access to AI at the earlier stages is through your private markets portfolio.”

That evolution will move from “information retrieval and synthesis” to “content creation” and ultimately come to “automation of workflows”. Gregory said that first evolution is well underway but that the latter two “are still in the earlier innings” – and that private markets are a great vantage for identifying and acting on innovation.

Regional diversification is essential to long-term portfolio resilience, but investors must be realistic about where innovation and growth are actually occurring.

“As a long-term private market investor, considering the relative value of the world, we think there are a couple of guiding principles,” she said.

One of them comes from Warren Buffett: Never bet against America. Gregory said that while the United States may face political and market uncertainty,  as Buffet said in 2020 “the institutions will get tested, they will hold, and innovation is what matters”. And while investors are increasingly interested in Europe and Asia, Gregory warned that “I keep looking for signs that we’re seeing real innovation out of markets like Europe, like Japan [but] I don’t see them in any of the data I’m looking at”.

Gregory said the development of artificial intelligence has been “a really big theme for venture capital for 20 years”, but that the latest developments have been “absolutely game changing”. A transformation that began at the end of 2022 “moved us from millions of parameters within AI models to billions,” ushering in the era of large language models and what she described as “foundational AI”.

At the time, Gregory was still deputy chief investment officer at the Future Fund where she said she had been advocating for the creation of an “AI investment working group”.

“We pivoted, and we did what we could do within our private markets portfolio,” she said. The fund invested more in data centres and innovative earlier stage companies.

Private investments gave the Future Fund exposure to “different sides” of an emerging technological revolution.

“That is what private markets can do for you in your portfolio,” Gregory said.  “That’s the format you should be thinking about private markets from.”

Untapped potential
Around 87 per cent of all US businesses with annual revenue of $100 million or more are private businesses, so the move by investors to scour private markets for opportunities is “pretty rational”, Gregory said.

“That’s over 18,000 companies in the US, and investors have really wanted exposure to these types of businesses in their portfolios,” Gregory said.

“We estimate… there’s about $US200 trillion in the asset management industry, and about $13.5 trillion of that sits in private markets. That is an average of a 6.5 to 7 per cent allocation to private markets. So whilst the growth has been pretty exponential, it was off such a small base that it feels like the wrong conversation to be having.

“When I talk about the volume of companies, the ability to diversify, to get access to great ideas, I think there’s a long way to go here.”

Gregory said private markets offer structural advantages over public markets, including  access to innovation and alignment of interests. They also play a crucial role in “feeding” listed markets, offering investors an opportunity to get in on the ground floor. Many of the world’s most valuable listed technology companies, including those now at the forefront of driving AI innovation, were “nurtured in private markets long before they became household names.”

“All of the Mag Seven – really important to your portfolios today – came out of private markets portfolios,” she said.