Private equity looks to the CIO as value multiplier

The CIO’s value in the rebounding private equity market appears to be increasing, as investors see IT as an enabler of new revenue and as a driver of cost efficiencies.

Several CIOs and other IT leaders in private equity (PE) environments say they see a trend toward the position being elevated, both with investors and at the portfolio companies they fund.

PE investors have begun to realize they can achieve better returns with strong and empowered CIOs at portfolio companies, says John Buccola, CTO of E78 Partners, a managed services provider focused on the private equity market.

The past practice of giving the CIO a few minutes at the end of a company board meeting is changing, with many board members of PE-backed companies now wanting more time with IT leadership, he says.

The elevation of the CIO position seemed to begin during the COVID-19 remote work era, but has sped up in the post-COVID years, with ongoing digital transformation efforts and questions about the best uses of AI, says Buccola, formerly a CIO for about 20 years at PE-backed firms.

“There’s much more of an investor focus on, ‘How can we take best take advantage of AI?’ or ‘What kind of a threat is AI going to be to the business?” he adds. “The CIO role is front and center on all these topics that are really top of mind for an investor.”

PE investors are increasingly recognizing digital transformation and AI as critical drivers of competitive advantage, adds Cache Merrill, founder and CTO at software development firm Zibtek. “As private equity firms invest in companies, they aim to increase value rapidly, and leveraging technology is a key strategy in achieving this objective,” he says.

Merrill comes to the PE space from a couple of perspectives. Zibtek counts several PE-backed companies as customers, and Merrill is an investor in PE funds. Beyond creating new revenue streams and cutting costs, CIOs can help PE-funded companies enter new markets, he says.

Third-wave value creation

Another reason for the elevated CIO role among private equity–backed companies comes from the focus on building value over the long term, as opposed to a near-term approach at many public companies, Buccola says.

“In a public market, you kind of live in quarter to quarter, and so there’s different motivations that drive growth,” he adds. “With private equity, the time horizons are sort of different, and the constituencies are different. There’s certainly an emphasis and a focus on value creation.”

PE investors have begun to evolve in their thinking about where value creation comes from, he adds.

“There was an early school of thought that if you changed out the CEO, then that led to value creation,” Buccola says. “Then there was kind of another wave that was really focused on the CFO and putting in really good financial governance and stewardship.”

A newer way of thinking about value creation focuses on IT, he says, because nearly every company, perhaps even the mom-and-pop coffee shop down the street, is a heavy IT user.

“With this third wave, we’re seeing private equity firms retain in-house IT leadership, and that in-house IT leadership has led to more value creation,” Buccola says. “Firms with great IT leadership, a sound IT strategy, and a forward-thinking IT strategy, are creating more value.”

The CIO touches everything

While Buccola’s evidence of an elevated CIO role is anecdotal, Michael Corrigan, CIO of large insurance broker World Insurance, sees the same trend. Like Buccola, Corrigan has observed a growing recognition in the PE world of the importance of IT.

“All roads lead to IT,” says Corrigan, a veteran of PE-backed firms, with World Insurance backed by Goldman Sachs and Charlesbank. “Every aspect of the business is dependent on some type of technology.”

Corrigan sees CIOs being more frequently consulted when PE-back firms look to IT systems to drive operational efficiencies. In some cases, cutting costs is a quicker path to return on investment than revenue growth.

“Every dollar you can cut out of the bottom line is worth several dollars of revenue generated,” he says.

In addition, many investors are increasingly focused on the value of the data that their portfolio companies hold for planning, forecasting, and making strategic business decisions, Corrigan says. “The voice of IT is very helpful when it comes to moving your business forward,” he adds. “How can you leverage your data to make better business decisions?”

IT tools can also play a big role in projecting the one-time costs of an equity purchase and determining the ongoing costs of operation, he adds. CIOs can help investors avoid major pitfalls, such as legacy technology debt, when they consider funding a new company, he says.

Zibtek’s Merrill agrees, saying that some investment groups are increasingly using CIOs to help with research before financing a new firm. “They’re being involved more even upfront with due diligence, so that investors are picking the right deals,” he says. “They could see things that traditional private equity folks who are basically financial analysts would not see.”

Merrill is surprised that he’s still pitched PE investments that don’t include a technology component. But the CIO role will expand even further as more PE investors recognize that every deal needs to include an IT plan, he says.

“The modern CIO in a private equity environment is no longer just a back-office role but a strategic partner capable of driving the business forward,” he says. “As technology continues to be a linchpin in achieving market differentiation and operational excellence, the CIO’s role will only grow in scope and significance.”