Private Equity: Are You Confident in What You Bought?
The Market That Made Everything Look Good Is Gone
For years leading up to 2022, investing in tech services and consulting firms was not particularly risky.
The market was growing fast. Demand outpaced supply. It did not matter much whether you invested in a low-quality staff augmentation shop or a differentiated premium firm. If they had capacity, revenue followed.
That environment is gone.
In early 2022, the market slowed down sharply. Demand dropped. Buyers became more selective. At the same time, AI entered the conversation and created a wave of noise and inflated claims.
Now, most firms sound the same.
They all talk about quality.
They all talk about capability.
They all talk about AI.
And they are all competing for the same, limited amount of work.
So Where Does That Leave Your Investment?
If you invested at the peak (2018.5 - late 2021), there is a good chance you are still trying to create the value you originally underwrote.
Many of those businesses are being led by teams that scaled well in a strong market but are incapable in this one. They are making hiring decisions around capabilities they do not possess or fully understand. They are updating GTM messaging without changing the underlying delivery model. They are acquiring smaller AI firms and trying to fit them into structures that were not built for what comes next.
Some of that activity creates the appearance of progress. It rarely creates real differentiation or durable value. Ultimately, you’re putting AI lipstick on the staff-aug pig of service offerings you bought.
What You Should Be Seeing From Your Portcos
Your investments should be creating UNIQUE, SPECIALIZED, DIFFERENTIATED offerings with AI.
One firm I’m close to received a large private equity (PE) injection. This custom software development (CSD) firm has done, or is doing, work for four of the top five enterprises in a very unique industry. To the PE, that means their expertise in that industry is significant and highly differentiated.
The reality is, they have no tailored offering for the industry, where all their experience is. Even more alarming, they have no targeted GTM for AI related to that industry.
This is a huge red flag and an immediate area for value creation.
The days of being a successful generalist CSD firm are over, but generalist AI firms are not enough right now either.
Specialization is key, and your firms need to be scouring their case studies, past client industries, tech deliverables, etc., to find focus areas for these offerings.
Here are a few examples:
Elsewhen - Has a highly unique AI offering for a holistic AI Productivity Engine
Thoughtworks - Has an AI-based modernization offering
Gorilla Logic - Has a unique AI-based delivery model
Epam - Has an AI e-commerce offering
This is a list of CSD firms from all different tiers and sizes that have realized the need for specialization and created differentiated AI offerings that correspond to their broader expertise. More specialization is needed.
Even if your portco only wants to be generalists, they'd better have a general, forward-deployed engineer (FDE) approach/solution.
The Questions Worth Getting Help With
Does the company have legitimate AI offerings that are differentiated in the market?
Are those capabilities and AI offerings real and being pitched in a way that sounds current?
Can the company clearly explain what it sells and why a client should choose it?
Using AI tools to deliver faster, with fewer people, is already commoditized: So, can your teams define the new AI-Driven Development Life Cycle (AIDLC) and how their tools will operationalize it? Have them draw it on a whiteboard!
Is the leadership team equipped to evaluate and hire for the next phase of the business?
Does the board contain forward-looking tech services experts who know how to CREATE value in this shifting market?
These are the areas that tend to determine whether a firm moves forward or stalls out, and most PE firms need help determining these answers for their tech service portco’s.
If You Are Evaluating Investments Today
The way these firms need to be evaluated has changed.
There are a few areas worth focusing on early.
1. Know the Tier You Are Buying
There are clear tiers in this market, even if they are not always labeled that way.
Understanding where a company actually operates in the industry, where you need it to be at exit, and what it will take to close that gap is critical. Most companies are not positioned where they believe they are.
If you’re investing in a Capacity Tier firm, have them describe their FDE model. If you’re investing in an Average Tier firm, have them present their AI offerings and the “why” they’ve chosen those. If you’re investing in a Premium Tier firm, ask them to describe how they will reduce higher rates and address team leverage through their new AIDLC approach.
2. Understand What They Are Actually Selling
This sounds basic, but it is often unclear.
You want to understand how the company describes its work, how buyers perceive it, and what actually drives decisions in competitive situations. Many firms have updated language around AI without materially changing what they deliver.
You should expect to hear a consistent story about how they are unique in this new AI world with relevant, real-life examples.
That gap shows up quickly once you are in-market.
3. Let the Right Data Tell the Story
Financial performance matters, but it does not tell the full story in services.
The underlying revenue signals tend to be more revealing. Where revenue is coming from, who the initial stakeholders are and where they sit, how accounts perform over time, and how dependent revenue is on specific individuals.
Having the right interpreter of the last three years of revenue at all accounts in that period will tell a story of client/market perspective that is critical, regardless of AI expertise or any other industry change.
These patterns help clarify how durable and EXPANDABLE the business really is.
What This Looks Like in Practice
A few recent examples illustrate this.
One firm presented well across every traditional metric. Revenue growth, margins, and positioning all looked strong. A deeper ROI review showed that roughly 22 percent of revenue was tied to bribes or kickbacks. There’s no judgment here, but those types of revenue sources can inhibit expansion and value creation for investors.
Another firm adamantly positioned itself as AI-native. In practice, the business operated as a low-cost staff augmentation firm with no AI offerings, basic AI tool usage, and no specialization related to AI. That distinction matters when you start looking at growth expectations and valuation.
In another situation, a company shared an aggressive forward-looking revenue plan. After reviewing historical performance, account structure, and offering strength, ROI projected that they would only achieve 71 percent of their plan. ROI was accurate to within one percent. We were accurate because we saw the lack of fundamentals.
I don’t care if you have a bench full of the most sought-after AI experts on planet Earth. If you don’t have the fundamentals squared away (client perspective, aggressive sales, unique offerings, etc.), those experts will simply drag down your margins.
When This Work Becomes Critical
This tends to show up at a few consistent points.
Before an investment, there is a need to better understand what is actually being acquired.
Shortly after close, when early decisions begin to shape the trajectory of the business.
And later in the hold period, when performance is not tracking to the original plan, and the reasons are not fully clear.
Where ROI Fits
Most private equity firms have strong financial diligence capabilities and experienced executives who have operated in the industries they invest in.
Fewer spend time looking at how service businesses generate revenue, how that revenue holds up over time, and what changes are required to move the business forward. Even fewer have executives who understand how to dissect the “fluff” of current AI offerings/positioning or evolve the GTM of a portco with real differentiation (directly tied to the company's legitimate experience).
That is the gap.
Digging into the real revenue story and creating the differentiated GTM is where ROI focuses. Our work centers on helping investors understand their business, identify where it needs to evolve, and assist them along the path to the outcome they are targeting.
Final Thought
There is usually a clear explanation for why a services business performs the way it does.
The challenge is that it is not always visible in the standard materials.
If a company cannot clearly explain what it sells, how it wins, and why it matters, the market will eventually answer that question for you. And by then, it is much harder to change the outcome.
Taking the time to understand those underlying dynamics early, with ROI, tends to change how the rest of the investment plays out.
