Private Fund Managers' Guide to Legal Automation

The Shift to Legal Automation Is Underway

AI and legal automation are helping private markets firms drive efficiency and value without increasing headcount, relying on expensive outside counsel, or leveraging low-quality outsourcing.

Private markets firms with lean legal teams can’t sustain efficient legal and compliance workflows without help. Workloads filled with repetitive manual tasks and questions from other teams are simply too time-consuming. When firms attempt to keep most work in-house, legal and compliance teams become mired in manual tasks, slowing the firm’s ability to fundraise, close deals, and navigate market and regulatory uncertainties.

To resolve this issue, firms are reimagining their approach to repetitive workflows, such as negotiating high-volume contracts, tracking side letter obligations, and managing entity information. Instead of relying solely on outsourcing or overburdened internal legal teams to handle repetitive, manual legal and compliance tasks, firms are looking to legal technology to help them automate processes to drive operational efficiency, reduce expenses, surface actionable insights, and generate greater value.

Recent advances in large language models (LLMs) and increased awareness of the effectiveness of legal workflow automation are driving the adoption of AI legal tech at top-performing private markets firms. To remain competitive, firms of all sizes are transitioning from repetitive tasks that create bottlenecks and hinder the dealmaking process to solutions, such as Ontra’s AI-powered private markets technology platform.

The Evolution From Outsourcing to Automation

Previously, private markets firms had two options: legal process outsourcing (LPO) or their external counsel. Firms outsourced various legal, compliance, and back office tasks to LPO service providers to reduce costs and allow teams to focus on core competencies. However, this type of outsourcing had limited success and came with several challenges, including poor communication, quality control issues, and security concerns.

Outsourcing to outside counsel addresses many of these concerns. Trusted advisors offer better communication, quality, and security. However, outsourcing low-risk, repetitive tasks like NDA negotiations to external law firms is costly.

Faced with the various challenges of outsourcing, firms are rapidly adopting a more automated approach with AI legal tech. Given recent advancements in LLMs, AI can now tackle complex and nuanced legal and compliance workflows with far greater accuracy and consistency than ever before. Even better, implementing AI legal tech to automate and streamline repetitive tasks addresses issues associated with globalization, firm growth, significant data volumes, a complex regulatory environment, and rising legal costs.

At this stage, AI works best integrated with a human element. It can’t fully replace experienced legal professionals’ judgment. Given AI’s current iteration, firms are focusing on AI tools with hybrid frameworks — in other words, AI legal tech with humans in the loop (HITL). With HITL AI, firms can move repetitive, manual tasks to the AI platform, trusting that skilled professionals review the AI outputs.

8 Trends Influencing AI Adoption in Private Markets

Several trends within the private markets are driving asset managers to adopt AI-powered legal automation tools:

Trend #1: Legal tech explosion

An Alvarez & Marsal survey of European PE firms found 45% are already deploying AI to support value creation, and 38% plan to do so by 2025. Advanced tech is deployed in fund managers’ operations as systems become more sophisticated and firms become more familiar with potential benefits.

Trend #2: Rising competition

As investors look for opportunities that yield higher returns and expect greater transparency and responsiveness, access to real-time data and analytics is critical to beating the competition. Private markets firms that continue to innovate and adopt AI legal tech tools are poised to succeed amidst evolving market conditions and changing investor preferences.

Trend #3: Regulatory complexity

The evolving regulatory landscape demands greater transparency and accountability from private fund managers and increases operational complexity. As a result, firms are adopting AI legal tech that can provide a single source of truth, automate reporting processes, and aid in exam and audit preparations.

Trend #4: Budgetary pressure

As predictions about short-term improvements in the exit market within the next two years fuel plans for expansion, private markets firms must find a balance between lowering costs and supporting future growth. According to the Gartner report, Predicts 2024, The Transformative Impact of Generative AI on Legal Technologies, “Legal leaders must consider adopting or developing legal technologies to meet business demands and avoid future budgetary pressure or questioning from senior leadership about why they aren’t making better use of automation.”

Trend #5: The digital transformation

As LLMs mature and AI models focused on distinct legal and compliance tasks emerge, many legal departments will use AI technology to carry out repetitive tasks. Providing automation support to higher-volume tasks can improve internal efficiency, cost savings, and legal risk management.

Trend #6: Democratization of private markets

Greater transparency and accessibility may allow firms to attract a wider range of investors, thereby accessing a vast pool of new capital and diversifying their risk. Democratization is an opportunity because, according to Bain & Co. estimates, individual investors account for half of the global wealth.

Trend #7: Increasing pressure on legal teams

A Q2 2024 survey by Legal Dive found that in-house counsel oversee significantly more business functions over time, including government affairs, ESG, and public affairs. As law departments are continually tasked with doing more, including expanding the business areas or functions they manage, legal professionals benefit from automating manual tasks and allocating more time to higher-value work.

Trend #8: Human-in-the-loop AI

AI tools are most effective when combined with human professionals. The best solutions leverage both AI and human expertise to automate repetitive tasks and provide actionable insights. HITL reviews of AI outputs confirm or correct accuracy, thoroughness, and consistency.

Benefits of AI Legal Tech for Private Markets

• Integrating data sources and analytics: Manually incorporating data from multiple sources is time-consuming, unproductive, and costly, whether relying on internal or external teams. Analyzing large data sets is nearly impossible without advanced tools and techniques. AI legal tools create greater efficiencies and cost savings by assisting in data aggregation and analysis.
• Creating a single source of truth: With a single source of truth for contract or entity data, private markets firms can avoid myriad challenges, from data inconsistencies and inefficient reporting to critical errors and delayed decision-making. An AI-powered legal automation solution can consolidate entity data, contract information, and other critical documents into a centralized platform. Legal and compliance professionals can efficiently search for information and surface actionable insights from this centralized repository.
• Leveraging data-driven insights: Relying on intuition and experience isn’t sufficient in complex and rapidly changing markets. A lack of real-time data can lead to poor decision-making, missed opportunities, inefficiencies, and a competitive disadvantage. Conversely, data-driven insights generated by legal AI technology help teams identify trends, optimize terms, mitigate risks, and sharpen their negotiation strategies. AI legal tech backed by industry-specific data is essential for private fund managers looking to make more informed decisions.
• Gaining a competitive edge: Leveraging the efficiencies and speed of AI-powered legal workflow automation, teams can entirely focus on identifying and capitalizing on emerging opportunities and closing deals faster than competitors bogged down with contract review, negotiation, and tracking. By providing more accurate and timely information, firms develop stronger investor relationships, driving a more effective investment strategy.
• Improving contract analysis and negotiation: Purpose-built AI legal tools for private markets assist in contract negotiations by efficiently and effectively handling repetitive legal agreements. The best solutions leverage features such as customizable digital playbooks, AI-enabled markup tools, originator email receipts that surface key provisions, timely contract negotiation summaries, and a human in the loop to enhance the quality and accuracy of AI-generated outputs.
• Digitizing entity management: Relying on manual processes to manage entity data, keeping physical files, and manually entering data leads to inefficiencies, errors, and siloed information scattered across different departments and locations—increasing the risk of non-compliance and higher costs. Digitized entity management provided by AI-powered legal technology streamlines operations, reduces risk, and improves decisionmaking by centralizing entity data, automating tasks, and enhancing collaboration.
• Maintaining human expertise: AI-powered legal automation can significantly improve efficiency and accuracy, but human oversight remains crucial. Adopting a HITL solution that combines robust AI legal tech with an established network of qualified, knowledgeable legal professionals increases the accuracy and completeness of contracts. It allows firms to incorporate nuanced judgment for complex private markets transactions.
• Optimizing resource allocation: Implementing AI tools for in-house teams delivers immediate business value by automating repetitive tasks. Instead of investing time in low-value process work, firms can allocate their legal and compliance professionals’ time to high-value opportunities and reduce the need for outsourcing to external legal counsel.
• Scaling efficiently: Overburdened legal teams are taxed with ever-increasing requests as workloads increase. When negotiations become more complex, time limitations and human error can lead to inefficient workflows and delayed decision-making. Adopting an AI-powered legal technology solution with a human in the loop for contract negotiation and management allows your growing firm to handle increasing workloads and complex negotiations without compromising quality or efficiency.

Although AI-powered legal automation can streamline operations, reduce costs, improve decision-making, mitigate risk, and enhance overall efficiency, perhaps the greatest benefit is the peace of mind and certainty that comes from knowing that every NDA, side letter, LPA, and other fund document adheres to the standardized playbook, is protected from human errors, and accounts for complex global regulations.

Implementing a reliable, purpose-built, AI-powered legal tech solution allows teams at private markets firms to get a better night’s sleep, knowing there won’t be any surprises now or in the future due to inconsistencies or errors in their contract or legal entity data. They can rest easy knowing their AI tools help them quickly surface answers to questions, data-backed insights, and opportunities for driving value.

How to Get Started With AI-Powered Legal Automation

Are you ready to gain a competitive edge, drive greater portfolio value, and realize higher investor returns with legal automation?

Finding the right AI legal tools to fit your unique needs is essential. Follow these six simple steps to get the most value from your AI legal tech investment:

1. Identify your unique areas of need: Start by focusing on high-volume, repetitive tasks such as document generation, contract review, due diligence, and org charts.
2. Look for tools to match your challenges: Seek AI tools designed specifically for private markets’ legal and compliance tasks that can easily integrate into your existing workflows.
3. Prioritize security and reliability: While adopting a mass-market AI tool might be tempting, the AI outputs may not be accurate, consistent, or follow industry best practices. Look for tools that deliver the convenience and efficiency of AI while adhering to industry standards and top-notch data security.
4. Buy for the future: Ensure the AI tool is scalable and backed by a stable organization. Private markets aren’t static, and the solution should be able to expand and contract with the firm.
5. Leverage onboarding and training: Your solution should provide the training your team members need to use your new AI tools effectively, including training on how to identify tasks that can be automated, how to use the tools, and how to interpret the results.
6. Start small and scale: Choose a tool that will allow you to begin by automating a few tasks initially. Create an adoption roadmap that enables you to test the technology and work out any potential issues with your technology provider.

AI-powered legal automation offers a comprehensive solution for private markets firms, streamlining operations, reducing costs, and mitigating risk. By automating repetitive tasks, providing data-driven insights, and supporting compliance programs, AI tools allow teams to focus on strategic initiatives, deliver greater business value, and drive returns.