Private Equity, due diligence and the importance of technology talent

Private Equity, due diligence and the importance of technology talent

Sharply rising interest rates. Inflation topping 10%. Floundering stock markets. Uncertainty around asset valuations…

Deal pipelines have slowed and data already shows a sharp decrease in exit and fund-raising activity. (H1 volume down by 26% compared to the same period last year, Source: Preqin)

After the private equity (PE) industry’s record-breaking performance in recent years, there can be no doubt that the next couple are shaping up to be considerably more challenging…

And there’s one element that should be dominating thoughts – technology.

Technology deals represent 30%+ of all buyouts—and a much higher percentage if you include deals where tech is central to value creation.

Firms almost always perform comprehensive tech due diligence on deals involving tech companies, e.g. pure-play software companies, but these are a very small (<20% of the market). Not enough perform due diligence aimed at underwriting tech-specific risks and opportunities.

The firms getting it right ensure that tech diligence is thesis driven, integrated closely with commercial diligence, and tied directly to the value-creation plan.

It can easily look too good to be true. Picture this:

A PE firm runs its commercial due diligence of a Fintech target.

The target controls a large chunk of its addressable market, is growing at 14% annually, and had net margins in the 16% range. The deal team is understandably impressed and are considering bidding a premium.

Then the tech diligence report arrives.

It transpires that the target’s Technology Leadership has allowed shockingly leaky security protocols which have led to recent ransomware attacks and a breach of most of the company’s customer contracts. The target is also leasing services on outdated tech infrastructure that is being discontinued soon, raising critical questions about its ability to continue delivering results.

What initially seemed  like a sure winner suddenly appears toxic.

The buyer walks away – bullet dodged!

The potential for technology to make or break a deal in private equity has never been greater. As digital disruption transforms industries across the global economy, it’s fair to say that almost any company is a tech company in one way or another.

It is clear that too many investors still view technology due diligence as a check-the-box exercise or fail to integrate it into a holistic effort to assess risk and underwrite value.

But even where the systems are sufficiently reviewed, there is another critical angle to consider – the people running the technology.

The ‘Human Capital’ due diligence.

It is well documented (and pretty obvious) that when PE firms wait too long to take action on talent issues the result is underperformace in portfolio companies.

But when talent issues remain unaddressed in the technology sector the stakes are even higher.

Having the right people in place to run technology is arguably more important than the actual technology being used (I may have to admit slight bias here as I work in a very people-centric business!).

PE firms invest vast amounts of money into companies (and are likely to increase that investment over the next 12 months). They pay for things that are going to bring higher revenues, create value, and eventually enable them to sell the company. Everything from ‘sexy’ new tech-enabled products and services to ‘boring’ ERP and CRM tools to enable timely and accurate financial data. Either way, companies need expertise to do this well, and ensure improved margins and value.

Now, more than ever, that investment has to include the very best Technology Talent.

With talented people leading technology innovation and implementation in businesses,  companies can truly perform to market expectations and beyond.

And that is what we are expert in at Vocative. We help companies to invest in the right people in the tech sector. Vocative provides recruitment solutions to business problems.

At Vocative we partner with founders, execs and PE investors to help them shape technology teams. We consult to scope and design roles to take to market, and secure the talent needed to genuinely create value.

Just ask our clients:

CEO, portfolio company: “…many thanks! I have to say this has been a great process with an exceptional result and not painful in the least!”

Investment Director: “the board was very happy with the whole process and I’ve been impressed. Thanks for the support and will certainly be in touch when the need next arises!”

CFO, portfolio company: “I have to say, you have made this incredibly easy. I will certainly be recommending you to everyone I know!”