Private equity firms review the technology of their portfolio companies for three reasons. To protect the value they have already bought, to find the value they have not yet unlocked, and to make sure nothing technical derails the exit. We recently worked with a private equity investor on exactly that, reviewing one of their portfolio companies alongside the services firm the investor already had in place. The pattern is worth describing, because it is how this work is increasingly done, and it is often done badly.
Here is why PE reviews portfolio technology, how the engagement ran, what made the specialist-alongside-incumbent model work, and what the investor got out of it.
Why PE reviews portfolio technology
At acquisition, technology diligence is about risk. Is there anything that makes the deal unsafe. After acquisition, the question changes. Is the technology capable of supporting the growth plan the investment case assumes, and what does it cost to make it so. Then, ahead of exit, it changes again. Will a buyer’s diligence find anything that knocks the price.
Most portfolio companies sit between the second and third question, and most have never had an honest answer to either. The management team is too close to it, and the technology leader, where there is one, has every reason to present things kindly. The investor has a thesis that depends on technology doing certain things, and usually no independent view of whether it can.
There is a fourth reason that is less often stated. Portfolio companies acquired a few years ago were often diligenced lightly on technology, because the market was moving fast and the deal team was focused on the numbers. The debt from that is now coming due, and investors are finding out what they actually bought.
The pattern, a specialist alongside an incumbent
Many investors have a services firm they trust. A consultancy, an accountancy practice with an advisory arm, a transformation partner. That firm knows the investor, knows the portfolio, and has the relationship. It is often very good at the commercial and operational side of a review. What it often lacks is deep, hands-on technology experience at the level of someone who has run engineering functions and sat in the CTO seat.
The sensible answer is to add that depth rather than replace the relationship. In the engagement I am describing, the incumbent firm led the commercial and operational review and owned the relationship with the investor. We were brought in to lead the technology assessment, reading the code and architecture, interviewing the engineering team, testing the claims and writing the technology findings into the single report. One voice to the investor, with the right expertise behind each part.
The alternative, the investor commissioning a separate technology review from a separate firm, produces two reports that do not agree, two sets of recommendations the management team has to reconcile, and a portfolio company reviewed twice. The alongside model avoids all of that.
How the engagement actually ran
Week one, scoping with the incumbent. Who owned which questions, how the technology findings would feed the overall report, what access we needed and who would arrange it. This conversation took a morning and prevented every turf problem that could have followed.
Weeks two and three, the assessment. Architecture and scalability against the growth plan. Code and engineering practice. Security and data. Intellectual property. The team, its key-person risk and its capacity against what the investment case assumed. Cost, both the run cost and the real cost of the plan. The same checklist we use for any diligence, with the emphasis on whether the technology could carry the next three years.
Week four, the findings. Written in the incumbent’s report structure, in their language, with the commercial consequences spelled out alongside the technical ones. Reviewed with the incumbent before it went to the investor, so the report spoke with one voice.
The management team saw the technology findings before the investor did, with a plan they could own. That mattered, because a review that lands on management as a verdict produces defensiveness, and a review that lands as a plan produces action.
What makes that work
A clear remit, agreed in writing. Who owns which questions, who talks to whom, and whose name goes on which section. Without this, two advisers compete for the client and the portfolio company gets reviewed twice.
No turf. The specialist is there to make the incumbent’s report better, not to win the account. Say that out loud at the start. Everyone relaxes, and the incumbent becomes an ally rather than a gatekeeper.
One report, one set of recommendations. The investor does not want two documents that disagree. The technology findings have to sit inside the overall picture, with the commercial consequences spelled out in the incumbent’s language.
Honesty with the management team. A portfolio company’s leadership knows what an investor-commissioned review means. The useful stance is to be straight with them, find the real issues, and give them a plan they can own, rather than producing a document that gets used against them. The management team is who has to deliver whatever the review recommends.
Speed. A portfolio review that drags on for months loses the investor’s attention and the management team’s goodwill. Four weeks for the technology assessment, inside the incumbent’s timetable, is about right.
What the investor gets
A technology picture they can trust, from someone with no stake in the portfolio company’s story. The real cost of the growth plan, including the technical debt and the hires nobody had budgeted. The risks a buyer’s diligence would find, with time to fix them before exit. And, usually, a handful of changes that improve delivery quickly and are visible in the next board pack.
In this case the investor also got something they had not asked for. A clear view of which parts of the management team’s technology story were solid and which were optimistic, which changed how the board conversation ran for the following year.
Our technical due diligence checklist is the framework behind it, and the fuller explainer on technology due diligence sets out when a board should commission one.
The common mistakes
Letting the incumbent cover technology thinly. A generalist consultancy asking a CTO ‘will the platform cope with growth’ and writing down the answer is not diligence. Someone has to read the code.
Commissioning a separate review. Two firms, two reports, two sets of recommendations, one confused management team.
Running it as an audit of management. A review that lands as a verdict produces defensiveness. One that lands as a plan produces action.
Leaving it until the exit process. Findings during a sale become price negotiations. Findings 18 months out become fixes.
The honest trade-off
Adding a specialist costs more than letting the incumbent cover technology thinly. The trade is depth for money, and on a portfolio company worth tens of millions the depth is cheap. The real risk is in the relationship, not the fee. If the incumbent feels threatened, or the remit is vague, the engagement produces friction instead of findings. Set it up properly and it produces both a better review and a stronger partnership for the next one.
If you are an investor with a services partner you trust and a portfolio company whose technology you are not sure about, that is the conversation to have. Start it on our contact page, or read about how we run a technology review.
Frequently asked questions
Why do private equity firms review portfolio company technology?
To protect the value they have bought, to find the value the technology could still release, and to make sure nothing technical reduces the price at exit.
Can a specialist work alongside our existing advisory firm?
Yes, and it is often the best arrangement. The incumbent keeps the relationship and the commercial review, the specialist leads the technology assessment, and the findings go into one report.
What does a PE technology review cover?
Architecture and scalability, code and engineering practice, security and data, intellectual property, the team and its key-person risk, and the real cost of the growth plan.
When should a portfolio company be reviewed?
Ideally in the first year after acquisition, to establish whether the technology can carry the investment case, and again 18 months before exit, so findings become fixes rather than price negotiations.
How should the management team be involved?
Openly. They should see the technology findings first, with a plan they can own. A review that lands as a plan gets delivered. One that lands as a verdict gets resisted.
How long does a portfolio technology review take?
Typically two to four weeks for the technology assessment, depending on access and the size of the engineering function, fitting inside the incumbent’s wider timetable.