You are sitting in a portfolio review, flipping through the deck. The deal thesis is clear, the market story holds, the numbers look fine. Then you hit the “IT” slide. One box, three bullets, and a big budget number you do not fully trust.
That is the problem behind Three Questions PE Firms Should Ask About Portfolio Company Technology. Technology is now a major driver of value and a major source of risk, yet many investment memos still treat it as a black box.
This article gives you three simple questions you can use in any board meeting, diligence call, or 100‑day session. Ask them out loud. Listen to the answers. You will know, very quickly, whether technology is helping value creation or quietly destroying it.
Why Three Simple Technology Questions Matter For PE Value Creation
Private equity cannot afford to treat technology as a line item anymore. It is now the engine under almost every lever in your model: growth, margin, working capital, and exit multiple.
Growth plans often depend on digital customer journeys, pricing engines, and data‑driven sales. Margin plans often depend on automation, system integration, and better forecasting. Studies on value creation in portfolio companies, like EY’s three tech pillars for PE value creation, keep pointing to the same idea: tech health is deal health.
On the risk side, outages, data loss, or AI misuse can hit revenue, trigger covenants, and scare buyers. Cyber incidents now show up in QofE discussions, and reports like RSM’s snapshot on private equity cyber risk show how fast this is rising on LP agendas.
Most mid‑market companies do not have a seasoned CTO or CISO in the room. So boards are flying partly blind. The three questions below give non‑technical investors a clear way to see what is really going on.
How Technology Can Quietly Erode Deal Value
Tech rarely blows up your deal in one day. It bleeds it out, month after month.
An add‑on closes, but system integration drags for a year. Teams live in two CRMs, two ERPs, and ten spreadsheets. Cross‑sell never hits plan, and synergy slides start to look “optimistic”.
A core platform is unstable. Customers see slow screens, checkout errors, or missing data. NPS drops, service credits pile up, and your “sticky” base is far less sticky than the model assumed.
Security is treated as an IT chore, not a board issue. Then a business email compromise or ransomware hit creates real downtime, heavy forensics costs, and anxious lenders. Exit conversations shift from “how fast can we sign” to “prove this will not happen again”.
Each one creates margin pressure, strained teams, and a lower exit price.
Why PE Firms Need Clear, Non-Technical Questions
Most deal partners and many CEOs are not technologists. That is fine. They do not need to speak in code. They need a way to ask sharp, plain questions that force clear, business‑first answers.
The three questions in this article work across the portfolio:
- In diligence, to test whether technology fits the thesis.
- In the first 100 days, to focus scarce change capacity.
- In annual reviews, to track progress and refresh the roadmap.
You do not need to manage every feature. You do need a simple framework that turns “IT updates” into real conversations about value, risk, and timing.
Question 1: Is Technology Clearly Aligned With The Value-Creation Plan?
Start with alignment. If you only use one of the Three Questions PE Firms Should Ask About Portfolio Company Technology, make it this one.
Your deal thesis has a short list of value levers: revenue growth, margin expansion, better customer experience, new products, compliance, maybe working capital. The technology roadmap should line up with those levers like gears in a machine.
If the tech team talks about tools but not outcomes, or if you see large projects no one can tie to the model, you are not funding value. You are funding noise.
Link Every Major Tech Spend To A Specific Value Lever
Ask this in your next board meeting: “For our top five tech projects, tell me in plain English how each one supports the value‑creation plan.”
Then listen for answers tied to clear levers, such as:
- “This project cuts manual order entry, so we remove X FTEs within 12 months.”
- “This upgrade shortens onboarding, which lets sales close deals two weeks faster.”
- “This data work lets us raise prices with fewer credits and less churn.”
Good teams talk in numbers: hours saved, error reduction, faster cycle times, higher conversion. Weak teams talk in buzzwords and “strategic platforms”.
If you cannot draw a line from each big tech dollar to a value lever your fund cares about, that is a gap you can fix.
Spot Red Flags: Pet Projects, Vendor-Driven Roadmaps, And FOMO AI
Some projects exist only because a past leader liked a tool. Others appear because a vendor pushed a bundle or a “special offer”. Now there is a new class of projects that exist because “everyone is doing AI”.
These are red flags:
- Projects no one can explain in one sentence without jargon.
- Roadmaps that read like a vendor catalog, not a growth plan.
- AI pilots with no data guardrails and no real business case.
Ask for a one‑page, business‑readable roadmap. Every major item should match a KPI in your value‑creation plan. If leaders cannot make that match, you either pause the work or reset it with a clear outcome.
Question 2: Is The Technology Stack Scalable, Stable, And Simple Enough To Grow?
The second question looks forward. Can the current stack support the next three to five years of growth, new products, and likely M&A, without a full rebuild at the worst possible time?
You do not need a detailed architecture diagram. You need to understand where the stack will crack when the business hits its targets.
Assess Scalability: Can Systems Handle 2x Or 5x Growth?
Use this question: “If our volume grew two to five times, what breaks first?”
Strong answers point to known limits and practical fixes, for example:
- “The current on‑prem system will hit license caps at 3x, so we budgeted a move to cloud in year two.”
- “Order intake can scale, but the finance team still closes the books in spreadsheets. We will need automation to support more add‑ons.”
- “Our API layer can connect new acquisitions, but we will need two more engineers to keep pace.”
You can also ask, “What would it take in time and money to fix those limits?” That gives you a sense of future capex and opex, and whether the stack is a growth asset or a hidden liability. Large firms like PwC have written about the future of portfolio company value creation, and tech scalability shows up in every serious plan.
Check Stability And Complexity: Where Are We Held Together By Duct Tape?
Mid‑market technology often looks fine from 30,000 feet, then falls apart in details.
Common warning signs:
- Fragile custom code no one fully understands.
- Old on‑prem software that only one “hero” can support.
- Point‑to‑point integrations that break every time one system updates.
- Frequent outages or slowdowns on core systems.
Ask three simple questions:
- How often do critical systems fail or slow down?
- How long does it take to recover?
- Do we have a short, clear plan to retire or modernize the worst pieces?
Too much complexity adds tax to every future change. It also makes each add‑on deal slower and riskier to integrate. Deloitte has linked this to value, showing how product and platform engineering drive private equity returns. You do not need perfection, but you do need a path away from duct tape.
Question 3: How Well Are Cybersecurity, Compliance, And AI Use Managed?
The third question is about downside protection. Growth is great. But unmanaged cyber, compliance, and AI risk can erase years of value in a single event.
You want to know where the “bad day” might come from, how big it could be, and what is already in place to reduce both likelihood and impact.
Understand Cyber And Compliance Risk In Plain Language
You do not need deep security jargon. You do need clear answers to a few points:
- What sensitive data do we hold, and where does it live?
- What happens to revenue and operations if that data leaks or systems go down?
- What controls and monitoring do we have, and how often are they tested?
Ask for concrete examples. Could a ransomware hit lock shipping for a week? Could a business email compromise trick finance into wiring funds? Do we face rules like HIPAA, PCI, SOC 2, or GDPR, and are we actually aligned with them?
Recent studies, such as Kroll’s report on portfolio cybersecurity in private equity, show how cyber events now delay deals or cut valuations. That is the real price of ignoring this question.
Set Guardrails For AI And Third-Party Tools
Your portfolio companies are already using cloud SaaS, APIs, and generative AI in daily work. Sales teams paste data into AI tools. Product teams connect external APIs. Finance outsources more work to third parties.
Ask two simple questions:
- “Where are we using AI today, what data feeds it, and what rules do we follow to avoid leaks or biased decisions?”
- “Which vendors can access customer or financial data, and how do we check on them?”
You are not looking for a ban or a free‑for‑all. You are looking for a short AI and vendor‑risk policy that people actually follow. That policy should say who approves tools, what data can be used, how vendors are vetted, and how often access is reviewed.
Conclusion: Turn Tech From Black Box To Clear Value Plan
The Three Questions PE Firms Should Ask About Portfolio Company Technology are simple on purpose. Is tech aligned with the value‑creation plan? Can the stack scale and stay stable as you grow? Are cyber, compliance, and AI risks managed in a clear, adult way?
Use these questions in diligence, in 100‑day plans, and in ongoing board reviews. They give investors and management a shared language, so “IT updates” become real discussions about value, risk, timing, and trade‑offs.
If you want help turning vague tech risk into a clear, actionable roadmap, visit CTO Input. To keep learning how experienced fractional CTO, CIO, and CISO leaders think about growth, cost, and risk, explore the articles on the CTO Input blog.