Technology due diligence: A revolution for private equity

Posted on May 2017

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There has been a fundamental shift over the last fifteen years that has seen technology and IT move from a business support role to a principal enabler of growth and value for organisations. As a result, investors have had to acquire a closer understanding of the technology and IT landscape of an investee business and due diligence has had to adapt. Intuitus continues to lead the way in providing the required insight.

Technology Evolution

Fifteen years ago, IT was firmly rooted as a support function within a business. Whilst important to the day-to-day running, it was not critical to the business and if an issue needed fixed it would usually be relatively straightforward to do so. The major computing players of the time, including IBM, Dell, EMC and Fujitsu, dominated the provision of services such as email and storage.

At this point an IT due diligence engagement was typically concerned with looking at MI systems, infrastructure, helpdesk, data back-ups and disaster recovery provisions.

Massive developments in the technology industry between ten and five years ago resulted in a big increase in the number of software companies, where technology performance is intrinsic to business success. Hosting services, internet service providers, managed service providers and niche technology providers also started to become prevalent. Investors began to move in on this rapidly-growing area, led at first by venture capital firms but soon followed by private equity and driven by the attractive prospect of reliable, long-term revenues from a sticky client base.

Completed Deals advised by Intuitus by sector

Perhaps not surprisingly, Intuitus began to advise an increasing number of deals in the technology space. The percentage of completed deals that we advised in the IT Services / Software / Technology / Communications / Gaming sectors rose from 12% (of all completed deals that we advised) between 2002 and 2006 to 17% between 2007 and 2011 and to 37% in the five years to 2016 (see graph above). Today, we advise more than 100 transactions per year.

This significant evolution in technology providers has corresponded with a huge rise in the number of technology-enabled businesses (not included in the above numbers) where a proprietary platform has been developed by an organisation, for example to provide it with a competitive edge. Many of today’s organisations are built on new ways of thinking to the extent that an argument can be made that all businesses are now essentially tech companies. The underpinning power has shifted from the major computing companies of fifteen years ago to the technology giants of today: Google, Apple, Facebook and Amazon.

The Evolution of Technology Due Diligence

So what does this mean for technology and IT due diligence? The infiltration of technology businesses into the private equity sphere has resulted in due diligence having to adapt to meet the ever-closer scrutiny of investors.

Core Due Diligence Offering:

  • Strategy, governance, controls, reporting and budgets
  • Team capabilities
  • Fitness for purpose of technologies, systems and infrastructure
  • Software development environment
  • Operating environment and third party relationships
  • Security framework
  • Data management and business continuity
  • Legislation / regulation compliance
Core Due Diligence Offering

At Intuitus, not only have we extended our consulting expertise to include new technologies, we have also evolved our core technology due diligence offering (see Core Due Diligence Offering list above) a number of ‘deeper insight’ services. These provide a greater understanding of value drivers (and potential value drags). Intuitus’ extended Technology Due Diligence includes:

  • A software Code Quality Review that provides a more forensic understanding of code quality, code maintainability and technical debt.
  • A Cyber Security Review that evaluates a company’s commitment to information security, its preparedness for and ability to withstand an intrusion.
  • Commercial and Market Insight that considers innovation and differentiation in the context of the wider market; buyer behaviour; business plan deliverability; and potentially disruptive technologies.

Just as private equity’s interest in a changing technology landscape is constantly evolving, so too is Intuitus’ technology due diligence offering. This extends to what we address in due diligence and to the type of expertise required to do this. Thus we maintain a currency of knowledge which, crucially, allows us to continue to advise our investor clients in those areas that have the greatest potential value impact.

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