Our Technology: Value Creation 2024 report showed that while a majority of sampled tech exits from Q1 through Q3 of this year implemented an M&A-based growth strategy, there were mixed results when it came to financial performance. 

In fact, M&A is a common strategy across all PE-backed sectors – and predictability is a challenge. 

"Recently, the realization that ‘roll-up strategies’ have failed or struggled to reach expected valuations when they come to market,” explained Christian Davis, an associate partner at JMAN Group, a Baird Capital-backed data consultancy focused on private equity portfolio companies’ value creation strategies. "[This is] because inconsistent data assets highlight a lack of integration and an inability to determine a clear equity story." 

According to Davis, this doesn’t mean that M&A is a non-viable option for portco-level growth moving forward – but it does mean that a lot more attention needs to be paid to due diligence and valuations. This is especially true given that macroeconomic conditions have created an ecosystem where high competition for assets have artificially inflated valuations.

"Investor expectations on the granularity and fidelity of information to pursue deals are equally as high [as competition for assets is],” he explained. “The previous expectation of what may have been considered reasonable information at the time to make an investment decision is no longer acceptable. CFOs and investment committees are not signing off on investments that don't have high-quality financial and commercial information to support how, why, and where organizations have grown."

According to Davis, a key pitfall he sees companies fall into is a lack of alignment between data teams and the CFO. “The CFO should be the number one consumer of [financial] data as these insights are the most important to ensuring long-term sustainable growth,” he said. 

One reason behind this is that CFOs should be using financial data to determine which add-on deals will be successful. Another reason is that CFOs are typically the main communicators on a portfolio company’s performance to its private equity sponsors. 

“Ultimately, [CFOs] are the core interface on the portfolio company's performance to the private equity firm,” he explained, adding that PE firms that have less operational capacity tend to place more responsibility in that realm on portco leadership.

“Increasingly, particularly in the lower-middle market, investors are looking to CFOs to take a more strategic view of the business,” Davis explained, adding that this includes key data collection and interpretation responsibilities. “However, the scale and complexity of data and the leadership and strategic role that CFOs play in the lower/middle market exerts significant strain.”

Davis concluded that to better equip portco-level CFOs, sponsors should look to invest in sophisticated technology solutions. 

“Nothing is resonating as much as it is as investing in data and technology to support the CFO function,” he said. “We’re just seeing a huge wave of interest and intrigue and capital spent on opportunities and risks associated with AI.”