John O’Connor, CEO and Chairman of J. H. Whitney Investment Management, joined Keith Black, Managing Director of RIA Channel, to discuss how machine learning can be used to evaluate geopolitical risks for portfolio companies.
All of the investments made by J. H. Whitney are in support of the national security or intelligence communities. The firm has relationships with the Office of Strategic Capital and the Defense Innovation Unit.
As a venture capital firm, J. H. Whitney has substantial investments in firms that focus on artificial intelligence and machine learning (AI and ML). Machine learning seeks to determine quantitative relationships between streams of data. While it can be difficult to separate coincidence from causation, this is a key goal of machine learning systems. The revolution in AI and ML is attributable to the rapid decline in the cost of data and computing power.
ML systems combine structured data and unstructured data in search of the greatest insights. Structured data can be housed in a spreadsheet with rows and columns of data. Unstructured data is unsorted textual data, such as the management discussion and analysis section of an annual report.
Today’s global geopolitical environment has similarities to the period before 1989-1991, when the Soviet Union dissolved and the Berlin Wall came down. The world is moving from unipolar, where the US is the dominant power, to a multipolar world. In addition to diplomatic and military power, today’s situation is also impacted by the power of economics and technology. These are the four pillars of comprehensive national power: diplomatic, information, military, and economy (DIME).
The big data models deployed by J. H. Whitney allows their defense-related clients to understand developments in the balance of economic power. As companies become increasingly global, it is important to understand the exposure to geopolitical events. The ten-factor model covers three categories: governance, operations, and commercial. Governance analysis looks at corporate management and their links to other companies. Operations analysis considers the physical locations maintained by each company. Commercial analysis considers each company’s relationships with their customers and suppliers. The composite risk rating shows the propensity for disruption under certain geopolitical scenarios. For example, governmental restrictions on chip and cellphone technology exports may lead to retaliation when a foreign country ceases purchase of aircraft. Because the model of building in China and exporting cheap goods to the world is over, supply chains will be reshaped.
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