If I were running AI diligence on a PE portfolio right now, I would not ask "are you using AI?"

I would ask which level of the spectrum you are actually on.

Because most portcos think they are a 4. They are a 2. And the gap between those two numbers is where the write-down lives.

I have sat in enough board meetings where the CEO confidently describes their "AI strategy" and it turns out to be one person experimenting with ChatGPT and a Zapier integration that breaks every Thursday. So I started mapping it. Five levels of AI readiness, and the honest version looks nothing like the IC memo.

At the bottom, you have companies with no centralised data at all. The CRM is a spreadsheet. Marketing attribution is "someone mentioned they saw an ad." BI means a monthly PDF nobody reads. You cannot build AI on sand.

One level up, the systems exist. Salesforce, HubSpot, an ERP from 2014. But nothing talks to anything else. Customer data lives in six places and nobody trusts the numbers. This is where 70% of PE portcos actually sit.

Then you get the connected companies. Integrated systems, clean pipelines, a dashboard that mostly works. You can answer questions about last quarter. Basic automation? Yes. AI? Not yet.

Above that, a few companies are running experiments. Someone built a proof of concept. Management is cautiously excited. But the POC lives in a sandbox and has never touched a production workflow.

At the top, you have AI embedded in pricing, forecasting, customer acquisition, retention. Not a project. How the business operates. Less than 2% of PE-backed businesses are here. The other 98% are being valued as if they are.

Most portcos are underwritten as a Level 4. Most portcos are a Level 2.

Every fund that cannot tell the difference is paying a premium for a fantasy.