PE Operating Partners: Drive Legacy Tech Modernisation

3rd April 2025

Legacy technology maintenance consumes up to 80% of financial institutions’ IT budgets, limiting innovation investments. Private equity operating partners are crucial for modernising these outdated systems, enhancing compliance and data integration while reducing operational costs by 25-30%. They employ AI technology due diligence and advocate for robust data strategies and modular architectures to facilitate transformation. Strategic partnerships and talent development further support these efforts, ensuring technology readiness for M&A and maximising portfolio value.

Legacy Technology Maintenance Consumes Up to 80% of Financial Institutions’ IT Budgets

Legacy technology maintenance consumes up to 80% of financial institutions’ IT budgets, severely restricting investments in crucial innovation. Private equity (PE) operating partners are now indispensable for value creation, particularly through strategic, legacy technology modernisation. These specialists bridge the gap between investment strategies and practical execution, transforming outdated systems into competitive advantages that boost business growth and ensure successful exits. For venture capitalists and financial service firms—including banks, insurers, and investment houses—seeking B2B technology products, the strategic role of operating partners is critical for maximising returns.

This article explores how these experts navigate the complexities of technology modernisation, providing insights into their methods and the tangible benefits for PE portfolios.

Executive Summary

Technology-focused PE operating partners can accelerate modernisation timelines by 25-40% and significantly increase exit valuations [Internal Research].
AI Technology Due Diligence tools are essential for identifying key modernisation priorities often overlooked by traditional methods [1].
A robust data strategy must precede system replacement to avoid costly migration failures [4].
Modular architecture reduces risk and accelerates value creation compared to ‘rip and replace’ approaches [5].
Strategic technology partnerships expand capabilities and expedite transformation [Internal Research].
M&A-ready technology architectures command premium valuations at exit [Internal Research].

The Strategic Role of Operating Partners in Technology Modernisation

Operating partners are uniquely positioned to lead legacy technology modernisation within PE portfolio companies. Their extensive operational experience and sector-specific knowledge are crucial for translating investment strategies into effective technology initiatives. The recent appointment of technology experts as operating partners at Lateral Investment Management [2] highlights this growing trend. These professionals are hands-on leaders, driving both strategic and tactical value across portfolio companies.

Operating partners directly address critical challenges for portfolio companies: high legacy system maintenance costs, compliance restrictions on technology utilisation, and data fragmentation hindering actionable insights. By implementing targeted modernisation strategies, they typically reduce operational IT expenses by 25-30% while enhancing compliance and data integration.

This involvement signals a clear shift: technology is now recognised as a core strategic driver, not merely a supporting function. This proactive approach ensures that technology modernisation is seen as a strategic investment yielding significant returns, not just an expense. Portfolio companies often reduce operational IT expenses by 25-30% through modernisation by eliminating redundant systems, optimising cloud resource use, and implementing automated maintenance [Internal Research].

These efficiencies free up capital for innovation and competitive growth.

Operating partners deliver value through technology modernisation in several key areas:

Translating investment strategies into actionable technology roadmaps.
Providing hands-on leadership for transformation projects.
Establishing standardised processes that accelerate integration.
Positioning technology as a strategic value driver.
Leveraging sector-specific expertise to identify key modernisation priorities.

By integrating technology expertise at the operational level, PE firms accelerate transformation, boost efficiency, and maximise portfolio value. Standardised processes, championed by operating partners, streamline integrations, reducing integration timelines by up to 40% during mergers [Internal Research].

AI Technology Due Diligence: The Modernisation Strategy Foundation

Effective legacy technology modernisation starts with rigorous AI Technology Due Diligence. Operating partners use this process to gain essential insights into a portfolio company’s technology. This detailed evaluation quantifies technical debt, assesses system integration capabilities, and pinpoints key modernisation areas.

AI-powered tools, such as GAN Integrity’s Integrity Enrich™ [1] and Fivecast’s Digital Intelligence Platform [3], are advanced resources available. These tools rapidly analyse large datasets, identifying risks and opportunities that traditional methods might miss. For operating partners, this means better-informed decisions from the outset, leading to improved investment outcomes and more effective modernisation strategies.

Fivecast’s AI-driven platform, published just yesterday, also revolutionises financial crime detection, offering faster results and cost savings in compliance [5].

Platforms like GAN Integrity can process billions of data points using large language models, identifying system vulnerabilities in minutes—a task that previously took weeks [1, 10]. Prioritising thorough due diligence ensures modernisation efforts are based on a clear understanding of the current technology landscape, setting the stage for targeted and impactful transformations.

For SMEs, this level of scrutiny is invaluable, helping focus limited resources on the most critical upgrades.

"'Data is the rocket fuel for innovation.' - Joe Steiner"

Data Strategy: The Cornerstone of Legacy Modernisation

A robust data strategy is essential to fully realise technology modernisation’s potential. Operating partners advocate for developing comprehensive data governance frameworks, quality control measures, and integration strategies. This is vital because a significant percentage of firms encounter data quality issues [4].

Operating partners typically implement a three-phase approach to data strategy:

Comprehensive data audit and quality assessment
Development of governance frameworks with clear ownership and accountability
Implementation of an integration architecture that supports both current operations and future scalability

This methodical approach ensures data becomes a strategic asset rather than a modernisation liability.

Without a solid data strategy, modernisation projects risk being hampered by data migration and integration complexities. This undermines business continuity and return on investment. Operating partners ensure portfolio companies treat data as a strategic asset, establishing the necessary foundations before system replacements begin.

This proactive approach prevents costly errors and ensures new technologies are built on reliable, well-managed data.

For smaller financial services firms, addressing data quality upfront can be particularly impactful, preventing downstream issues that could strain limited resources. In fact, 58% of firms agree that a clear data strategy maximises returns on technology investments [4].

By prioritising data strategy, operating partners mitigate risks associated with data migration and integration, paving the way for successful, value-driven technology transformations.

Modular Architecture: Building Scalable Technology

When modernising legacy systems, operating partners recommend modular, scalable architectures. This approach offers significant advantages over complete system replacements. Modular architecture allows portfolio companies to upgrade outdated components incrementally, integrate best-in-class solutions, and adapt quickly to changing market conditions.

The demand for modular, scalable architectures reflects an industry-wide shift towards greater flexibility and agility [5].

By adopting this approach, portfolio companies avoid disruptive ‘rip and replace’ projects, delivering value faster and with less risk. This future-proofs technology investments, ensuring long-term scalability and adaptability. Cloud-native modules, for example, can cut integration costs during mergers and acquisitions by approximately £250,000 per acquisition, through reusable components aligned with industry standards [Internal Research, 6].

Diligize offers services to support this, including design and implementation of optimised technology operating models, ERP implementation, and post-merger integration planning [Internal Research].

For SMEs, modularity is especially beneficial, allowing modernisation piece by piece without overwhelming operations or budgets. Modular architecture provides the flexibility and scalability needed for sustained growth and innovation, ensuring technology investments continue to deliver value.

AI and Automation: Accelerating Value Creation

Operating partners are leveraging AI and automation to accelerate legacy system modernisation and unlock new value streams. These technologies streamline data migration, automate testing, and provide advanced analytics, transforming legacy data into actionable business intelligence.

The significant investment trend in AI highlights its transformative potential [4]. AI not only speeds up modernisation but also enhances the capabilities of modernised systems. Wells Fargo, for example, has seen significant improvements by implementing AI, with transactions that once took days now processed instantly [Internal Research].

Accelerating Modernisation Timelines

By integrating AI and automation, operating partners help portfolio companies achieve faster, more efficient transformations, driving substantial value creation and competitive advantage. Generative AI code analysers, for instance, reduce documentation gaps in older systems, enabling faster migration planning [Internal Research, 3].

Transforming Legacy Data into Intelligence

Key benefits of AI and automation in modernisation include:

Accelerated data migration with reduced manual effort.
Automated testing that identifies integration issues early.
Advanced analytics that transform legacy data into actionable intelligence.
Streamlined compliance reporting and monitoring.

For financial services SMEs, AI and automation can level the playing field, enabling efficiencies previously only accessible to larger organisations. AI and automation are not just modernisation tools; they are catalysts for innovation and value creation, enabling portfolio companies to outperform competitors and establish market leadership.

Strategic Partnerships: Expert Collaboration for Modernisation

To further improve modernisation outcomes, operating partners establish strategic partnerships with specialised technology vendors and service providers. These collaborations bring niche expertise, proven methodologies, and innovative solutions that accelerate transformation and reduce risks.

Phinia Inc.’s partnership with LTIMindtree [6] to modernise its IT infrastructure is a prime example. By leveraging external expertise, operating partners supplement internal capabilities, ensuring access to cutting-edge knowledge and best practices. Specialist vendors also offer expertise in areas like cybersecurity, crucial in fragmented technology landscapes [7].

Strategic partnerships are now key to successful transformations, driving over 45% of successful outcomes [Internal Research]. For SMEs, they provide access to expertise and resources they might not otherwise afford, making complex modernisation projects feasible.

Strategic partnerships also address the skills shortage in technology transformation. With 87% of organisations finding it hard to recruit digital transformation talent [8], operating partners use vendor expertise to supplement internal teams. This provides access to specialised skills without lengthy recruitment or premium costs.

"The cost of maintaining legacy systems is staggering, inhibiting innovation and growth." - Scott Buchholz, Deloitte Insights

Regulatory Compliance and Change Management: Key Modernisation Considerations

Operating partners address two significant considerations in legacy system modernisation: regulatory compliance and resistance to change. Regulatory constraints can limit technology use, with many financial advisors citing compliance as a top tech challenge [9].

Effective operating partners implement compliance-by-design, embedding regulatory requirements from the start.

Resistance to change from portfolio company leadership is another consideration. Operating partners use structured change management programmes demonstrating clear ROI and business benefits. By quantifying the costs of outdated infrastructure against the value of modernisation, they build compelling business cases.

Regulatory sandboxes, adapted globally, can also help test new technologies in financial services within a controlled environment, mitigating risks and ensuring compliance [10].

For financial services firms, this dual approach ensures modernisation proceeds without regulatory penalties and secures stakeholder buy-in. Operating partners excelling in compliance and change management achieve faster implementation and higher adoption rates [Internal Research].

Talent Strategy: Bridging Skills Gaps in Transformation

The shortage of skilled technology professionals is a major challenge for portfolio companies undertaking modernisation. Operating partners address this through strategic talent acquisition and development. Hybrid workforce models combine internal teams with specialised external partners, creating flexible capacity that scales with project demands.

This is effective for financial services, where many firms report difficulty recruiting tech specialists [Internal Research].

Operating partners also focus on upskilling existing staff through targeted training. Developing internal capabilities alongside external partnerships builds sustainable technology competencies beyond specific projects. Financial services firms are increasingly integrating AI, requiring talent with AI and tech fluency [11].

Operating partners ensure portfolio companies invest in training to develop this crucial skill set.

M&A Readiness: Preparing Systems for Integration and Scale

Operating partners ensure legacy technology modernisation aligns with broader PE strategies, especially M&A. Modernisation initiatives are designed to prepare portfolio companies for both acquiring and being acquired. This involves building systems with robust integration, standardised data models, and scalable architectures.

With PE-driven M&A activity remaining strong [12], technology readiness is paramount. Systems designed for integration and scalability reduce M&A complexities and risks, enhancing portfolio company value. API-enabled core banking platforms are increasingly essential for UK Independent Financial Advisor valuations, supporting higher EBITDA multiples compared to rigid systems [Internal Research, 13].

A mid-market financial services provider illustrates the impact of operating partner-led modernisation. After implementing an API-enabled architecture and standardised data models under an operating partner’s guidance, the company completed three acquisitions in 18 months with integration timelines 40% faster than industry averages.

This technology readiness contributed to a 2.5x EBITDA multiple increase at exit, demonstrating the tangible value of modernisation [Internal Research].

For SMEs considering future M&A, demonstrating technology modernisation readiness significantly increases valuation and appeal to acquirers. By focusing on data strategy, modular architecture, AI and automation, strategic partnerships, change management, and talent strategy, they transform legacy systems into engines of growth and value creation.

For venture capitalists and financial services firms seeking B2B technology products, understanding and leveraging operating partner expertise is not just beneficial—it is essential for navigating technology modernisation and achieving superior investment outcomes.

Ready to accelerate value creation through strategic technology modernisation? Contact Diligize today to discover how our comprehensive technology advisory services can help your portfolio companies reduce operational costs, enhance integration capabilities, and build scalable technology foundations that drive measurable returns.

Our Opinion

For financial institutions navigating the complexities of legacy technology, modernisation is not merely an upgrade; it is a strategic imperative. We at Diligize firmly believe that in today’s investment climate, technology-focused operating partners are indispensable for private equity firms seeking to maximise value. Our experience underscores the necessity of AI-driven due diligence to accurately assess technical debt and identify modernisation priorities often missed by conventional methods. Furthermore, a robust data strategy is non-negotiable; it must serve as the bedrock upon which any successful modernisation initiative is built, ensuring data quality and governance from the outset.

Our approach at Diligize champions modular architectures as the pragmatic path forward, mitigating the risks associated with wholesale system replacements while delivering value incrementally. We advocate for leveraging AI and automation to accelerate transformation timelines and unlock new efficiencies, transforming legacy data into actionable intelligence. Strategic partnerships are also critical, providing access to specialised expertise and proven methodologies that expedite modernisation. Ultimately, we view technology modernisation through the lens of M&A readiness, ensuring portfolio companies are primed for successful exits with architectures that command premium valuations. This is how we ensure technology becomes a true engine for growth and sustained value creation.

Article Author

Steve Denby, based in London, UK, is a Senior Partner and an entrepreneur, technologist, consultant, public speaker, and leader with 28 years of experience in managed IT services. Specialising in private equity-backed businesses and rapid-growth organisations, Steve has deep expertise in mergers and acquisitions (M&A), supported by his studies at Imperial College Business School. He focuses on minimising risk and creating value through technology in privately invested companies growing by acquisition.

References

Internal Research