The Revolutionary Impact of AI in the Valuation Advisory Space

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The Revolutionary Impact of AI in the Valuation Advisory Space

By Ioannis Michopoulos, Vice President, Complex Securities & Financial Instruments, Stout

The role of Artificial Intelligence (AI) in the modern valuation advisory space has been pivotal and instrumental in reshaping the operational excellence, strategic thinking and applied thought leadership focus of market participants as well as the nature of market dynamics. AI has shed light into unsolved business problems, incomplete computing capabilities, resource inefficiencies, scalability issues, and organic inter-company integration challenges. AI has also provided valuation practitioners, appraisers, consultants, and financial executives with access to powerful and dynamic models and real-time information that have transformed the chessboard of business intelligence and valuation accuracy. While there is still a long road ahead in terms of the development of AI and its integration into everyday business life, the evolution of machine learning (ML), natural language processing (NLP) and robotics have revolutionized the valuation advisory space in many ways, the most critical of which are described below.

• Data Structure and Advanced Data Analytics

Valuation appraisers now have access to a “treasury” of data through advanced machine learning, supervised and unsupervised deep learning, and advanced data analytics techniques. Data that has been traditionally extracted through manual intervention (i.e., information from financial statements, market intelligence on customer products, online business due-diligence, historical pricing indications, etc.) can now be extracted with advanced ML and NLP techniques and summarized into powerful business reports. Additionally, data analysis techniques like clustering, principal component analysis, artificial neural networks, decision trees, and random forests boost the quality of data and the statistical significance of the data available for valuation and financial analysis purposes.

• Advanced Predictive Analytics, Computation Techniques, and Cloud Scalability

The development of supervised and unsupervised deep learning techniques has exponentially increased the predictive accuracy of forecasting models and the robustness of computationally intensive techniques (i.e., improved credit rating models, advanced sentimental analysis, dynamic pricing techniques, dynamic market segmentation analysis, more sophisticated valuation models related to FDA drug applications, etc.). Additionally, the development of data visualization techniques (i.e., parallel coordinates, scatter plot matrix, kernel density estimation, network diagrams and Box & Whisker plots, etc.) has played a fundamental role in better understanding of the nature of data, the processing of inputs in generating more customized and advanced outputs, and the minimization of the standard error in valuation models. Furthermore, the focus on the development of scalable cloud-based technology infrastructure had yielded fruitful results, since there are now many products available that provide a variety of data analytics that cover a broad set of variables and business needs and are aligned with the digital strategy of the underlying companies.

• Optimization and Automation

One of the fundamental principles of the AI revolution wave was the automation and optimization of large, repetitive procedures that involve a considerable amount of manual human intervention. During the last decade, there has been significant growth in this area, and valuation advisory firms have been consistently focused on the competitive advantages obtained by the automation of processes/procedures in order to develop more sustainable and profitable operational frameworks, advanced scale economies as well as boost their market position and offer a broader variety of diversified products and solutions. Additionally, valuation advisory firms have been primarily concerned over the past years with creating more advanced thought-leadership content through the optimization of valuation processes, techniques, and products that generate “customer alpha” in terms of the value accretion for the clients based on the more and more complicated financial products, business transactions, quantitative business needs, and overall sophistication mentality. Typical examples of improvements in this area are the automated processing of engagement letters and engagement lifecycle files, invoices, standardized valuations for financial reporting of tax purposes (i.e., 409(a) purposes), real-time analytics solutions, automated quarterly market/ business/segmentation reports, robotic applications, etc.

• Increased Productivity, Advanced Strategy and Disruptive Innovation

The inclusion of a variety of AI types within the main operation model of valuation advisory firms is linked to higher productivity, increased quality of offered services, increased market share, diversification of solutions and broader coverage, more effective cost & diversification leadership style, and improved margins. Despite the substantial investment in terms of capital and resources needed upfront, valuation advisory firms realize the importance of AI from a financial, operational, and social perspective and strive for the successful integration in a timely manner. Firms with increased AI capabilities have higher flexibility in terms of the strategic managerial focus and the penetration in niche market areas that were not mapped in the prior years due to lack of the appropriate infrastructure, leadership style, and subject matter expertise, the ability to support such a respective growth model as well as the lack of market competitive advantages. AI capabilities and tools allow companies to boost their innovation efforts to capture more precisely the market powers of supply and demand, the ability to influence markets and customers with the most sophisticated understanding of the data landscape and the power to lead the direction towards more sustainable, innovative business solutions and disruptive, adaptable and scalable technologies.

While AI has seen tremendous growth the past couple of years, there is still a long way ahead in terms of a more harmonious integration with society and a more concrete understanding of the true capabilities and applications of AI in business overall. Unsupervised deep learning techniques and robotic applications are expected to play a foundational role in the further development of AI within the valuation advisory spectrum. Stout, among other top-tier valuation advisory firms, has heavily invested on the AI capabilities, and we are looking forward to the continuous successful implementation of more and more advanced AI-capable applications and valuation solutions.

My personal view is that AI is the solution to the organic need for scalable progressive business/social evolution and the problem of the non-modern lack of sophistication embedded in the conservatism of the optimistic stagnation yielded frequently from the illusion that success is a given privilege and that the current business status quo lasts forever. AI is going to give us answers to problems that we don’t even imagine that currently exist. I am very excited about the prospects of AI and what the future might hold for the valuation advisory world.

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