The Private Equity market has had its well-documented challenges in the last 18 months. Macroeconomic factors have contributed to a slower deal-making environment, and we have seen a record amount of dry powder across a number of funds in the market.

Moving into H2, there are signs of stability which will create a better space for driving deals, even if economic and geopolitical factors continue to impact the market. That being said, it is clear the mechanisms and opportunity for value creation are different to where they have been in the last few years.

One key area we are seeing as a driver of value is Technology. It can be argued that this has been the case for a number of years, but the influence of the Chief Technology Officer (CTO) is changing in line with the market. The need for a commercially minded CTO in a portfolio business is vital for a fund to fuel value creation opportunities. The level of pragmatism within this individual is key – there is a finite time period attached to any private equity investment, and this is something that has to be taken into account by any technology leader when planning strategy and change.

There is often a criticism of some CTOs in the market, saying that they can be overly evangelistic about technology and the necessary growth and performance strategies for businesses. Within any investment cycle there will be opportunity, but this opportunity has to be realistic for the timeframes and allow for a future view of value for the next investor.

This viewpoint was reinforced by Brian Walker, a previous CTO in growth firms turned Technology Operating Partner who has worked with Advent, Nexus and advised many other private equity funds. In Brian’s view a market like this needs very targeted solutions, and targeted solutions require context.

Brian’s view is that you cannot count on everyone else coaching the CTO on the context of an investment or a business – you need a technology leader who can take steps towards the business and can meet them in the middle. If this doesn’t happen then technology becomes a “black box” which can make anyone uncomfortable, especially private equity funds.

This type of CTO is highly sought after in today’s market and will come at a premium. While hiring them might be more expensive initially, it will save money in the long run and will create a better exit posture. In Brian’s eyes, when technology is optimised internally over a hold period it shows the next investor, at the due diligence phase, the opportunities for growth as opposed to areas which require fixing – which in turn protects the valuation.

The emphasis on the evolution of technology leaders is evident in the increased presence of a Digital or Technology specific Operating Partner within the fund landscape.

We have recently completed mandates for this profile into small and mid-market funds with a focus on driving true value across the portfolio, ensuring candidates have the all-important level of pragmatism as discussed earlier. In the mid-market, this can be a great way of adding an additional layer of business/ investment focus to your portfolio CIO’s and CTO’s.  Performed effectively, they can be an advisor and someone who can help to keep decisions and strategy within the portfolio and aligned with the bigger picture and fund objectives.

For the smaller funds, there is a growing realisation that value creation is something they need to be better at. The use of independent Operating Partners is growing as it gives them the capacity and the ability to have more influence which is needed in this market.

There is a lot of change across funds in this area – and lots of differing structures at play. Brian commented that PE funds don’t have time for those that don’t have context or a broader field of view; they need people who can find and advise on the fit for purpose solution.

It is clear that the focus on technology leaders with commercial acumen in private equity backed businesses continues to grow as creating value becomes more challenging. Their ability to seamlessly integrate technology with strategy enhances efficiency, boosts revenue growth, and positions the business for a successful exit.

As funds seek the higher returns of years gone by and competitive advantages, the commercially savvy CTO will become indispensable, spearheading the technological transformations that turn potential into multiple. The supply of these individuals and strong Operating Partners is the challenge.

In conclusion, the role of a Commercial CTO will continue to be pivotal in navigating the rapid evolution of technology in business. As AI and other innovations advance, they not only present new challenges, but also open up other avenues for value creation. Companies must adapt swiftly to harness these opportunities, making the presence of a proactive, pragmatic, strategic and commercial CTO increasingly important.

John has recently worked on a variety of CTO/ CIO and Operating Partner hires in the Private Equity space, so please do get in touch with him to discuss this topic further.