In today’s business world, Private Equity (PE) plays a pivotal role, powering a significant portion of the UK economy. With over 2 million jobs supported by PE and Venture Capital (VC), and a direct contribution of £137 billion to the GDP in 2023, these firms are a driving force in the business landscape. Codurance recently hosted panel events to discuss the unique challenges of PE-backed CTOs and others in technical leadership roles, from balancing day-to-day responsibilities with preparing for exits, to aligning technology with financial outcomes. Here’s a look into the key takeaways for CTOs navigating this demanding but rewarding space.
Understanding the PE vs. VC Landscape
Although PE and VC are both vehicles for investment and growth, their approaches and expectations for technology roles differ:
- Private Equity (PE) generally invests in more established businesses with a steady cash flow and solid product-market fit. The focus here is on optimising and scaling, often within an existing structure that may include technical debt and a more rigid legacy tech stack.
- Venture Capital (VC) traditionally takes on more risk, investing in younger companies with higher growth potential. However, recent shifts show VC firms demanding greater due diligence and a clearer ROI strategy, with reduced emphasis on speculative investments.
These differences can shape how CTO's respond and how they prioritise. In a PE-backed environment, the CTO might prioritise optimising for profitability and operational efficiency, while a VC-backed CTO might emphasise product development and innovation.
Navigating the Unique Demands of a PE-Backed CTO Role
PE-backed companies have finite investment timelines, and every decision made must align with the potential exit strategy and bottom-line impact. CTOs in these environments face distinct demands:
- Dual Responsibilities: PE-backed CTOs juggle two primary responsibilities: executing on the company’s current tech strategy and preparing for a potential sale or exit. The latter requires foresight, with technology decisions tailored to support valuation growth and long-term scalability.
- Financially Aligned Metrics: PE firms prioritise metrics that underscore a business’s profitability and growth potential. Key performance indicators (KPIs) include:
- EBITDA: Often viewed as the "true north" of profitability.
- Gross Profit Margin: Essential for understanding how efficiently the business operates.
- Annual Recurring Revenue (ARR) and Lifetime Value (LTV): Indicators of future cash flow.
- Capex vs. Opex: Optimising these costs directly affects profitability, a key consideration as a company approaches an exit.
For a CTO in this space, aligning tech investments with these metrics requires a blend of technical and financial acumen, balancing infrastructure and engineering expenses against the potential ROI.
Elevating Technology’s Role in the Boardroom
One of the most challenging aspects of the PE-backed CTO role is ensuring technology remains a priority for decision-makers, especially when tech isn’t the company’s core product. Codurance’s panellists shared key strategies for winning the board’s buy-in:
- Speak the Language of the Boardroom: Avoid jargon-heavy tech talk. Instead, present technology’s impact in a commercial light, highlighting areas such as cost reduction, increased efficiency, and scalability.
- Financial Literacy: Understanding key financial concepts (e.g., CAPEX/OPEX, EBITDA) and expressing technology investments in these terms allows tech leaders to build trust with non-technical stakeholders.
- Focus on Business Outcomes: Highlighting the potential commercial impact of tech investments—such as increasing the EBITDA multiplier or enhancing gross profit margins—can resonate with PE executives focused on profitability.
Navigating the PE Lifecycle: From Acquisition to Exit
The PE lifecycle, from acquisition to value creation and eventual exit, fundamentally shapes a CTO’s strategic focus:
- Acquisition Phase: In the early days following acquisition, there’s typically a major shift in company structure, reporting lines, and sometimes personnel. This is often accompanied by a push to solidify systems and processes. CTOs are often tasked with preparing for technical due diligence to reassure stakeholders of the technology’s health and scalability.
- Operational Optimisation: Once the business stabilises, the PE firm’s focus shifts to improving operational efficiency. CTOs must evaluate and optimise the tech stack, aligning it with business objectives. This stage often involves refining infrastructure, reducing tech debt, and enhancing cross-functional collaboration with finance, marketing, and sales teams.
- Exit Preparation: As the company nears the exit stage, CTOs work alongside financial leaders to ensure the company is an attractive acquisition. This includes demonstrating a scalable tech infrastructure, a solid data strategy, and effective cost control, all of which enhance valuation and appeal to potential buyers.
“As soon as a new acquisition is complete, from day one post-M&A, the PE firm is starting to prepare for the exit”
Preparing for Technical Due Diligence
Technical due diligence is a crucial part of the PE acquisition process, yet it can sometimes be overlooked due to time constraints. Codurance’s panellists emphasised that tech leaders can get ahead by conducting self-assessments before external due diligence occurs:
- Evaluate Tech Debt and Scalability: Identifying and addressing technical weaknesses early is essential, especially in areas where tech debt could impact future growth.
- Develop a Data Strategy: Many PE firms look for companies with a mature data infrastructure and a clear AI or data strategy, as these are increasingly seen as essential to business intelligence and operational efficiency.
- Highlight Product Alignment: CTOs should ensure that the tech and product roadmaps align closely with commercial goals, thereby reinforcing the company’s value proposition in a way that resonates with potential investors.
A thorough internal assessment not only strengthens the company’s technology foundation but also instils confidence in PE stakeholders during the formal due diligence process.
Leveraging Relationships and Stakeholder Networks
PE-backed companies provide CTOs with a vast network of resources and expertise, though navigating these relationships can be challenging:
- Building Relationships: Fostering relationships with other C-suite executives, particularly the CFO, enables CTOs to champion tech investments within a financial context. Working closely with product, sales, and marketing leaders also fosters cross-functional alignment, ensuring technology decisions support business objectives.
- Tapping into PE Expertise: Many PE firms offer deep insights into areas such as go-to-market strategy, financial restructuring, and risk management, all of which can provide invaluable context and direction for CTOs shaping tech strategy.
The Role of Technology in Value Creation and Risk Management
One of the panel’s core themes was the role of the CTO in driving valuation growth and managing risk throughout the investment lifecycle. Codurance’s experts noted several areas where CTOs can make a tangible impact:
- Enhancing the EBITDA Multiplier: Aligning tech investments with profitability can directly affect the company’s valuation multiplier. For instance, automating manual processes or implementing scalable infrastructure can boost operational efficiency, which in turn supports EBITDA growth.
- Protecting the Technology Footprint: Ensuring a strong, secure technology foundation from the outset is vital. Security, scalability, and system stability are now non-negotiable for PE-backed companies, as any weaknesses here can deter potential buyers.
- Building for Scalability and Resilience: PE firms often have ambitious growth targets, and it’s the CTO’s responsibility to ensure the tech stack can support these goals. Investing in scalable, future-proofed infrastructure positions the company to handle growth and acquisition seamlessly.
Advice for CTOs: Thriving in the PE-Backed Environment
Codurance’s panel discussion also provided actionable advice for CTOs looking to succeed in PE-backed roles:
- Know Your PE Firm’s Goals and Vision: PE firms vary widely in their approaches and expectations. Some pursue quick exits, while others take a longer-term view. CTOs benefit from understanding the firm's investment thesis and aligning tech strategy with these goals.
- Prioritise Cross-Functional Skills: The ability to speak the “business language” in boardrooms, combined with financial literacy, allows CTOs to champion tech in a way that resonates with stakeholders.
- Maintain a Focus on Product-Driven Value: For PE firms, “product” often holds more weight than “technology.” CTOs should ensure that the product and tech strategies are closely linked, demonstrating how the tech roadmap enhances the product’s market positioning and revenue potential.
Conclusion: Leading for Long-Term Impact and Exit Success
As Codurance’s panel made clear, CTOs in PE-backed businesses walk a unique path. The demands are high, but so too are the rewards. By balancing operational excellence with an eye toward long-term value, understanding the metrics that matter, and building strong cross-functional relationships, CTOs can navigate the complexities of the PE-backed environment. At the same time, they have the potential to position technology as a critical driver of both profitability and valuation.
In a space where financial precision meets innovation, PE-backed CTOs who successfully integrate commercial insight with technical expertise are poised to not only navigate but thrive in this challenging role, leaving a lasting impact on their organisations. The role requires agility, insight, and a commitment to continuous learning—qualities that will set PE-backed CTOs apart as they drive meaningful value for their businesses and investors alike.
Codurance has a range of solutions and assessments that support CTOs to build and deliver a business case for change in Private Equity-backed business from data and AI to software and cloud.
We have supported many Private Equity-backed businesses to get to growth faster. Read our success stories at https://www.codurance.com/industries
