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Three hidden private equity value opportunities in software deals

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Software due diligence can help private equity investors uncover value creation opportunities that can support deal execution

    • Transaction data analysis shows how private equity investors can leverage software due diligence to generate commercial value and reduce R&D risk post-close
    • Execution gaps can be identified during software due diligence in areas including product roadmap governance, R&D measurability and ROI, and R&D collaboration

    As private equity firms pursue software deals, the M&A due diligence process can be used to not just evaluate a potential investment but also to identify critical post-close value creation opportunities.

    An EY-Parthenon team analysis of transaction diligence data[¹] from 180 recent deals involving software companies and software-enabled services companies points to three common operational and talent gaps that can frequently be flipped into value creation opportunities. If private equity investors address these early on in the holding period, they can unearth commercial value, accelerate time to market for new features and improve the efficiency of software R&D teams.

    1. How private equity can use due diligence that can enhance product roadmap governance and commercial success post-close


    Transaction data analysis by an EY-Parthenon team indicates that approximately 30% of software companies do not follow leading industry practices around product roadmap governance, resulting in acute challenges related to managing how development teams are spending their time. Companies often struggle with appropriately prioritizing roadmap initiatives, ranging from tech debt remediation and new feature development to product enhancements. The data also show that companies’ product roadmap objectives and broader product strategy can often be misaligned. As a result, companies are often poorly prioritizing R&D investment, which can be detrimental to commercial strategy. For instance, a company may be working on a feature that customers have not shown interest in. Or a company may be prioritizing work on minor feature enhancements while competitors are working on brand new, innovative features that will differentiate them in the marketplace.


    During due diligence, PE firms can take specific steps to scrutinize a company’s product strategy and product roadmap:

    • Assess whether future roadmap items are tied to the broader product strategy and understand whether regular roadmap reviews are taking place and – if so – how roadmap initiatives are being prioritized. For instance, by determining if current or prospective customers have committed to using a new feature once it becomes available, companies can identify the most impactful areas for R&D team time investment, with the goal of improving current customer satisfaction and the chances of landing new customers. By placing go-forward roadmap items into buckets such as “competitive requirements,” “growth initiatives,” “minor feature enhancements,” and “maintenance and technical debt remediation,” a company’s R&D investment philosophy can be identified and evaluated. PE leaders can then better understand whether a company is under- or over-investing, and what may be motivating those investment decisions. For example, a company might have more technical debt, or fewer major new features planned, than expected.
    • Evaluate historical roadmap delivery to understand if upcoming product commitments are realistic. Particularly during M&A due diligence, it is not uncommon for a target company’s management team to make lofty claims about how soon a new product or a major new feature will be ready for release. If there is a major roadmap item whose timely launch is critical to sales growth, but the company has a demonstrated history of missing deadlines, a private equity investor may need to consider a temporary increase in R&D spend beyond management’s projections or delay other roadmap items to set a more realistic timeline for a large initiative.
    • Identify whether the company tracks feature usage, post-release, to understand customer adoption. Investors should understand how the company uses data to help refine product strategy and identify future roadmap initiatives to support increased product differentiation.

    Case study
     How a PE firm used software diligence in tech-driven education M&A
    A private equity firm hired EY-Parthenon to assess a technology-driven company in the education sector. The investment thesis required that the company release new interactive learning games to increase customer retention and expand its competitive advantage. During diligence, the team learned that both the product and engineering functions were led by the CEO, who oversaw the overall product strategy and approved roadmap initiatives partly based on calls with a select number of existing customers. As a result, the company’s roadmap was highly tactical, with limited innovation. More than 75% of initiatives were sourced from customers, with limited vetting for competitive and market-related relevance.
    An EY-Parthenon team identified an opportunity for the company to prioritize investments in new games using a more holistic approach. The CEO was receptive to hiring a chief product officer and overhauling the company approach to roadmap governance. The company was eventually purchased by the private equity firm, based in part on the value creation opportunity from improving product-market fit.

    Critical questions private equity fund managers can ask in software due diligence:

    • Is the company’s roadmap of planned and new product features mature and clearly aligned to management’s stated product strategy and market needs?
    • How does the company develop its R&D investment plans and align development priorities with customer priorities?
    • How can the company improve predictability of software delivery timelines and ROI by tracking metrics on R&D progress and velocity?
    • Will the company be able to increase portfolio integration and cross-selling by improving collaboration across software R&D teams, especially as part of an inorganic growth strategy?

    2. What software R&D metrics can do for private equity portfolio companies

    Of the 180 deals analyzed, two-thirds involve companies that did not have KPIs in place to track performance in the R&D organization, which can be an opportunity for private equity investors to build higher quality software faster and improve time to market by investing in developer infrastructure, tooling and testing processes.

    PE portfolio companies can push for greater adoption of various tracking metrics, such as roadmap delivery history, scrum team velocity, defect escape rates, automated tests and other metrics. These can be highly correlated with predictable software delivery and software development lifecycle (SDLC) processes, the EY-Parthenon team’s analysis shows.

    Proactively and quantitatively tracking development progress can help R&D leaders better align software development timelines with commercial plans to develop new features for customers. Automated tracking of KPIs can inform personnel allocation decisions to mitigate delivery risks, support initiatives to reduce development costs, and help plan and prioritize future roadmap initiatives based on existing capacity and developer velocity. Similarly, tracking performance metrics can help R&D teams proactively prevent incidents tied to reliability, performance and security, which can improve customer satisfaction and potentially mitigate customer churn.

    Case study
     How diligence helped a CTO with product delivery timelines
    During one recent software M&A due diligence project, an EY-Parthenon team worked with the CTO of a company with more than $1b in annual revenue to understand why product delivery dates were consistently missed and how to improve delivery predictability. One key issue discovered during diligence was the lack of tool adoption and coordination to support software development. Some work was managed in one project management application, while other work was maintained manually in spreadsheets. This resulted in a lack of visibility into development progress and repeated failure to reliably estimate when work would be completed.
    To remediate some of these issues, the client hired scrum masters to fill existing organizational gaps, leveraged agile coaches and developed an “Agile Certificate” program where teams could win badges by adopting and leveraging appropriate tooling. These strategies — which can serve as leading practices for private equity owners — helped to increase tool adoption to support metric tracking. Within six months, work visibility and agile leading practices increased, and redundant development efforts declined.

    3. Why R&D collaboration can help product integration and cross-selling

    Many of the private equity-owned companies EY-Parthenon teams have assessed and worked with have conducted meaningful software M&A activity to build a robust product portfolio. But transaction data analyzed by the EY-Parthenon team show that companies often do not pay enough attention to integrating R&D talent from these acquisitions. This can result in software development practices that vary across the organization. Of companies we recently evaluated as part of a due diligence engagement, a majority executed at least one M&A transaction in the past three years and a majority of those did not have a cohesive or unified product portfolio. This opens up the following post-close value creation opportunities for PE investors: 

    • Tightly integrating R&D teams can help companies be more successful in combining products into a cohesive offering with stronger cross-selling opportunities. Removing R&D silos by better integrating teams can loosen trapped capacity and enable people to share expertise across adjacent development efforts.
    • Reducing delays in delivery timelines and bringing new features to market by:
      • Setting up recurring cross-team touch points
      • Establishing a chapter-and-guild model to provide teams with an outlet to share leading practices and promote process standardization across an organization
      • Reorganizing teams across value streams (e.g., parts of the platform or release cadences) to create natural boundaries for teams to be self-sufficient and to minimize external dependencies
      • Building documentation repositories to facilitate knowledge dissemination and to create an audit trail for the key point of contact/collaborator
    • Formalizing “company norms” to improve collaboration can be helpful, especially for R&D teams located across multiple geographies. In addition, co-locating teams for a temporary or extended period can increase knowledge transfer and development efficiencies, and long-term centralization of full-time staff can reduce time zone-related collaboration challenges.

    Case study
     How diligence helped resolve R&D challenges
    An EY-Parthenon team was evaluating a company that had grown inorganically through four acquisitions, with the goal of bringing a robust and unified suite of offerings to the marketplace. The product vision and future roadmap involved building a unified user interface across the four applications to provide customers with a seamless experience. However, the team found that behind the scenes, there were still effectively four separate R&D teams, each of which was taking a different technical approach to the integration project. As a result, the completion timeline for the integration and revenue uplift associated with the integration were severely jeopardized.
    Initially, the private equity buyer thought that this challenge was an acquisition dealbreaker. However, as part of the diligence process, the EY-Parthenon team outlined a set of R&D collaboration leading practices. These included rotations to expose personnel to other application components and one another. The new practices also included a new educational incentive program for top performers designed to reduce knowledge bottlenecks and accelerate responsibilities. Equipped with a set of leading practices, the potential upside changed, enabling the private equity firm to gain confidence in its investment thesis and ultimately proceed to acquire the target. 

    Valuation multiples can be rich within the software sector. It is incumbent on private equity investors to identify areas of value creation opportunity early in the acquisition process. Some of these opportunities may not be evident at first glance but can be identified during M&A due diligence with thorough investigation and analysis.

    Thank you to Senior Associate Naina Wodon in the EY-Parthenon Software Strategy Group, Ernst & Young LLP, for contributing to this article.


    Even during the due diligence process for an investment, private equity investors can identify ways to help software and software-enabled companies post-close. Common value creation opportunities include improving product roadmap governance to help bolster product differentiation, tracking key R&D metrics and preparing to invest in other areas that can create a more cohesive portfolio and improve cross-selling.

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