The creator of ChatGPT, OpenAI, is extending an enticing offer to private-equity firms, surpassing rival Anthropic, as both AI companies seek buyout partnerships to secure new funding and promote the uptake of enterprise AI solutions, according to insiders.
OpenAI is pledging private-equity firms a guaranteed minimum return of 17.5%, which is notably higher than standard preferred instruments, as revealed by two knowledgeable sources. Additionally, the company is providing investors early access to its latest AI models as it looks to collaborate with firms like TPG and Advent for its joint venture, according to three sources.
Recently, the company has intensified its focus on the enterprise sector, an area where Anthropic has traditionally excelled. In contrast, Anthropic’s enterprise-oriented private-equity deal does not offer similar returns, the sources noted.
OpenAI and Anthropic are vying for alliances with buyout firms to facilitate the rapid deployment of their AI tools to potentially hundreds of established private businesses owned by these firms, enhancing the adoption of their models and fostering customer loyalty on a large scale.
The two firms are competing for lucrative business clients to utilize AI, positioning themselves for possible public listings within this year.
Also Read: Apple’s John Ternus seen as top contender as Tim Cook considers an insider successor
The joint venture framework could mitigate substantial upfront costs linked to deploying engineers for client model customization, relieving financial pressures on OpenAI and Anthropic as they prepare for public offerings, while also allowing for clearer segment reporting that supports the IPO story, according to two people acquainted with the discussions.
OpenAI and Anthropic are racing to secure comparable partnerships with private-equity firms, a fresh approach for the AI industry.
“There’s a significant competition to secure as much enterprise business and as many desks as possible,” remarked Matt Kropp from Boston Consulting Group’s AI division, emphasizing that once a company integrates a customized AI model, switching to a competitor becomes considerably more challenging.
“I foresee considerable scalability in this.”
OpenAI, TPG, and Advent have declined to comment, while Anthropic did not respond to a request for comment.
Not for everyone
At least two private-equity firms opted out of participating in either joint venture, citing concerns regarding economics, flexibility, and profit characteristics of the partnerships, according to two sources.
Thoma Bravo, one of the largest software-focused buyout firms globally, chose not to engage after internal discussions led by managing partner Orlando Bravo, who raised questions about the long-term profitability of joint ventures with OpenAI and Anthropic, pointing out that many of its portfolio companies are already utilizing AI tools, the source said.
Thoma Bravo refrained from commenting.
Some investors in private equity have expressed skepticism about these partnerships, suggesting that large firms already have direct access to OpenAI and Anthropic without the need for capital investment.
These individuals pointed out the pressure on buyout firms from their investors to outline a clearer AI strategy. They observed that, with declining technology valuations, such joint ventures might not significantly enhance access to AI tools or generate extra income. Any substantial advantage, they noted, would likely hinge on securing board positions, equity interests, or other terms that are exclusive to lead partners.
Other private-equity firms are in negotiations with OpenAI and Anthropic regarding participation in the joint ventures, although many are anticipated to take smaller stakes lacking board roles or lead positions, four sources indicated.
Sweeteners
The investment package also ensures priority over other joint venture partners and downside protection, the sources stated, with more private-equity firms discussing smaller investments in the joint venture.
OpenAI anticipates that its joint venture will achieve profitability, supported by the robust demand for its AI tools and the engineers implementing them, a source familiar with its financial strategies disclosed. The partnership will generate revenue through implementation services, sharing profits from developed and deployed products, and co-owning new products created, the source added.
Reuters previously reported that OpenAI is in advanced negotiations with firms such as TPG, Bain Capital, Advent International, and Brookfield Asset Management to raise approximately $4 billion with a pre-money valuation of around $10 billion.
Anthropic, which has made strides in the business sector, is following a similar plan and has been engaging private equity firms like Blackstone, Hellman & Friedman, and Permira for its own enterprise-focused venture, as previously reported by Reuters.
