Private equity buyers evaluate dozens… maybe hundreds… of different data points in the due diligence process for acquiring a new company. Financials, market forces, competitive landscape, key staff, leadership team… the list goes on. But one of the things you simply cannot ignore — regardless of whether you’re a PE buyer or just purchasing a company yourself — is tech due diligence. That said, for private equity (PE) buyers, the stakes of technology due diligence are particularly high. Unlike strategic acquirers, PE firms often operate under compressed timelines and a clear mandate to deliver returns within a defined investment horizon. This makes identifying tech-related risks — and opportunities for value creation — an essential part of a successful deal process.

Evaluating Scalability and Efficiency

Private equity firms often aim to scale a company rapidly to maximize returns. A thorough evaluation of the target’s technology infrastructure is crucial to assess whether it can support accelerated growth. Outdated systems or limited automation can become roadblocks, requiring costly upgrades that erode margins. As Bain & Company notes, “The potential for technology to make or break a deal in private equity has never been greater than it is today.”

By identifying inefficiencies or manual processes during diligence, PE buyers can pinpoint areas where tech investments could unlock substantial value — whether through streamlined operations, reduced overhead, or faster go-to-market execution.

Leveraging Tech for Operational Turnarounds

For firms targeting distressed assets or companies ripe for operational improvement, technology can be a lever for transformation. Modernizing IT infrastructure, adopting cloud solutions, or implementing advanced analytics tools can lead to significant cost savings and improved operational agility. Effective technology investments can create the foundation for rapid turnarounds (where applicable); these situations can help PE firms to hit their performance targets.

Protecting Against Cyber and Compliance Risks

PE firms often acquire companies across diverse industries, each subject to different regulatory and cybersecurity landscapes. Inheriting non-compliant or insecure tech environments can lead to unanticipated liabilities. A PwC report highlights that

Cyber due diligence also should reveal deal-breakers – or more likely, deal-changers – for the acquirer. Walking away altogether may be unlikely, but there may be issues that lead a buyer to reconsider the target’s value – and therefore price. An acquirer needs to be able to identify and quantify those issues and either push the target to address them before closing or renegotiate the price and possibly other terms.

The latter could be an opportunity to shift seller proceeds to remediation investment, but the acquirer needs to plan for how the issue will be addressed – and paid for – after closing and during integration. Still, the potential to shift burden to sellers may appeal to serial acquirers who are making smaller deals and are confident they can manage the risks.

Private equity buyers must also assess whether the target company’s IT practices align with industry-specific standards. For example, acquiring a healthcare company entails compliance with HIPAA, while a European-based acquisition requires adherence to GDPR. These considerations are critical not only for deal execution but also for protecting the fund’s reputation and assets.

Enabling Exit Strategy Success

A forward-looking tech evaluation benefits PE firms during the eventual exit process. Buyers increasingly value robust, scalable, and well-integrated IT systems.

By positioning the portfolio company as a tech-enabled, future-ready business, PE firms can maximize their return on investment and appeal to a broader range of potential acquirers.

For example, Blackstone pulled off a major heist with their purchase of Thomson Reuter’s Financial & Risk division:

Refinitiv was formed in 2018 when a consortium led by Blackstone acquired a 55% stake in Thomson Reuters’ Financial & Risk (F&R) division, valuing the new entity at approximately $20 billion. This strategic move aimed to carve out F&R from Thomson Reuters and establish Refinitiv as an independent company. Under Blackstone’s ownership, Refinitiv underwent significant technological enhancements:

• Digital Integration: The company focused on integrating advanced analytics and digital tools to enhance its financial data services.
• Innovation in Services: Refinitiv invested in developing new products and services, leveraging technology to meet the evolving needs of global financial markets.

Outcome: The technological transformation made Refinitiv an attractive acquisition target. In 2021, the London Stock Exchange Group (LSEG) completed the acquisition of Refinitiv for $27 billion, reflecting a significant increase in value from the initial investment for Blackstone.

Obviously, a huge amount of tech due diligence went into this Blackstone purchase… which paid off handsomely. Now most PE acquisitions aren’t quite such smashing successes (or at least not for the raw return value captured here), but it goes to show just how important tech due diligence can be in driving PE returns.