Is Your Tech Due Diligence Good Enough?

Bain & Company's 2022 Global Private Equity Report argues that technology due diligence has become a material underwriting input for buyout firms, yet many sponsors still treat it as a check-the-box exercise. According to Bain research, 31% of all buyouts last year involved technology companies, and a larger share targeted nontech companies for which technology is central to the value proposition. Comprehensive tech diligence is almost always performed on pure-play software deals, which represent less than 15% of the market, but the rate falls to roughly 9% across buyouts generally. PitchBook data cited by Bain shows deals for tech-enabled companies have tripled over the past five years.

Bain frames the risk in concrete terms. The article opens with a fintech market leader that appeared highly attractive, controlling almost half its addressable market, growing 15% annually, and posting net margins around 17%. Tech diligence then revealed a recent ransomware attack, a breach affecting most customer contracts, and reliance on infrastructure being discontinued within a year. The buyers walked away.

The report states that top-tier tech diligence is tied explicitly to the deal thesis from the outset and is integrated with commercial diligence, so that deal teams see the interdependencies among strategy, finance, operations, and technology. In a healthcare information combination, a thesis-driven review showed that the target with the superior customer-facing services was built on aging, duplicative platforms containing more than 10 million lines of code across seven systems. The other company had migrated much of its back end to the cloud. The findings led the deal team to move the superior front-end services onto the cloud-based platform and decommission the legacy systems.

Bain also argues that diligence findings should flow into the value-creation plan rather than being filed away after closing. In an AI-driven benefits administration deal, external experts assessed the maturity of the target's virtual assistant system and concluded the company was well on its way to a differentiated capability, informing cash flow and coverage assumptions in the financing model. In a more than $2 billion carve-out of an operating system software developer, diagnostic interviews produced R&D recommendations and a candid board discussion that the existing roadmap would not allow the company to reach its growth targets organically.