PE Tech Due Diligence: Shielding Investments from Hidden Risks

17th March 2025

Private equity firms in financial services must conduct thorough technology due diligence to shield investments from hidden risks, particularly in the face of rapid digital change. This includes assessing cybersecurity vulnerabilities, legacy systems, regulatory compliance, and ESG technology capabilities. Effective assessments should leverage AI for efficiency and focus on continuous monitoring and integration strategies. Additionally, evaluating digital skills and change management readiness is crucial for successful technology adoption, ensuring investments create value rather than erode it.

Private equity firms in financial services face a significant challenge: achieving strong returns amidst constant digital change. Technology is a crucial driver of value, but it also brings complex, often hidden risks. For banks, insurers, and investment firms acquiring B2B tech products, robust technology due diligence is not just advised, it’s vital. It acts as a crucial shield for investments, uncovering vulnerabilities before they can damage value.

The Growing Need for Technology Due Diligence

Technology’s central role in driving value in private equity deals is clear. Financial services are investing heavily in digital infrastructure. For example, TrinityBridge, a PE-backed wealth manager, recently invested £35 million in technology upgrades [1]. This significant investment highlights a key trend: technology is essential for both efficiency and competitive edge.

Therefore, insufficient technology assessment can expose investments to considerable financial risks. Undetected issues can severely impact returns. For PE firms, a precise pre-acquisition evaluation of technology is paramount. This ensures a clear understanding of necessary investment and prevents unwelcome costs after acquisition.

Technology due diligence is more than a simple IT audit; it is a strategic necessity. AI-powered platforms are increasingly important for enhancing the speed and depth of these vital assessments. These tools are rapidly becoming indispensable in due diligence, offering the ability to quickly analyse complex systems and data, accelerating the identification of potential risks and opportunities [9].

Cybersecurity Vulnerabilities: Revealing the Threat

Cybersecurity vulnerabilities are a major hidden threat. Financial fraud, increasingly sophisticated AI-driven cybercrime, and regulatory gaps cost the financial sector an estimated $500 billion each year [2]. These losses directly threaten portfolio value. Cybersecurity breaches can cause catastrophic financial and reputational damage.

Therefore, thorough technology due diligence must include robust cybersecurity assessments. This is especially crucial for financial institutions navigating increasingly sophisticated threats and strict regulations. Assessments must go beyond basic checks, deeply examining incident response protocols.

Advanced techniques such as dark web monitoring and zero-day vulnerability simulations are becoming essential. Continuous network monitoring offers stronger defence than periodic audits. Cisco’s frameworks have shown up to 47% faster threat neutralisation [3].

For smaller financial services SMEs, cost-effective measures are vital. Implementing frameworks like the NIST Cybersecurity Framework or ISO 27001 can provide structured approaches to managing cyber risks without excessive costs [10]. Financial services firms should particularly focus on implementing Zero Trust Architecture and advanced threat hunting capabilities to protect sensitive customer data and transaction systems.

Cybersecurity due diligence is not about compliance checklists; it is about actively protecting investment value against a constantly evolving threat landscape.

Key Recommendations for Cybersecurity Due Diligence:

Implement continuous network monitoring for real-time threat detection.
Adopt frameworks like NIST CSF or ISO 27001 for structured cyber risk management.
Conduct regular dark web monitoring to identify potential data breaches early.

Legacy System Assessment: Uncovering Technical Debt

Legacy systems are common in financial services, often concealing significant technical debt. This debt appears as hidden costs and integration challenges. Over 70% of digital transformation projects face delays due to legacy technology issues [4]. This figure, while from the public sector, is highly relevant to financial institutions managing similarly complex legacy environments.

Effective technology due diligence must thoroughly evaluate legacy infrastructure. It needs to uncover technical debt and integration complexities. Assessing modernisation feasibility is crucial. PE firms must understand the current state of systems and the true cost of modernisation.

Potential integration obstacles with new systems must be identified, alongside skill shortages for maintaining legacy systems. Failure to address legacy systems can undermine post-acquisition value creation, leading to costly surprises and project failures.

Financial services firms often rely heavily on third-party technology providers, creating significant dependency risks. Technology due diligence must evaluate these relationships, assessing vendor stability, contract terms, and contingency plans. Effective third-party risk management frameworks can reduce vulnerability to service disruptions and ensure operational resilience.

For SMEs in financial services, a phased modernisation strategy can reduce risks and costs. Starting with API integration to connect legacy systems with modern applications can provide immediate benefits without wholesale system replacement [11]. As Chandra Mouli Yalamanchili noted, APIs are pivotal in modernising payment systems, reducing integration times from months to weeks [20].

API-first strategies are increasingly adopted to modernise legacy systems, facilitating integration of old banking systems with new approval platforms, ensuring secure and flexible payment flows [20]. Legacy system assessment is about proactive problem prevention, ensuring smooth integration and modernisation pathways.

Key Recommendations for Legacy System Assessment:

Prioritise API integration for connecting legacy and modern systems.
Evaluate third-party vendor dependencies and risk management frameworks.
Develop phased modernisation strategies to mitigate risks and costs.

“Every industry and every organization will have to transform itself in the next few years. What is coming at us is bigger than the original internet, and you need to understand it, get on board with it, and figure out how to transform your business.” - Jeanne W. Ross of MIT

Regulatory Compliance and Technology Risk

In financial services, regulatory compliance is essential. Technology is central to meeting these strict demands. The dynamic regulatory landscape, highlighted by UK Finance’s call for reforms [5], necessitates thorough compliance assessments. Technology due diligence must rigorously evaluate regulatory compliance capabilities, including:

Data protection and GDPR compliance
Alignment with evolving frameworks like DORA and MiCA in the EU [12]
Payment systems regulatory requirements
Operational resilience capabilities

Non-compliance can trigger substantial penalties and operational disruptions. Assessments must verify how technology systems support compliance and their adaptability to regulatory shifts. Potential compliance gaps must be identified and addressed.

Payment systems, for example, face intense regulatory scrutiny. Technology due diligence ensures systems meet current and future regulatory demands, preventing costly penalties and maintaining operational integrity.

AI-powered platforms are increasingly effective at automating regulatory compliance monitoring and reporting. Platforms like Certa streamline third-party risk management, while Oracle Financial Services uses AI to combat financial crime and automate investigative processes [23], [24].

These tools enhance operational efficiency and ensure adherence to complex regulatory frameworks. For SMEs, AI-powered regulatory technology (RegTech) platforms can automate compliance processes efficiently, with platforms like Certa and Covecta offering scalable solutions [24], [19].

For SMEs, focusing on the most relevant frameworks, such as the FCA’s Operational Resilience Policy in the UK, is vital. Proof-of-concept testing for disaster recovery scenarios is now a mandatory check, ensuring operational resilience under regulatory scrutiny [13].

Key Recommendations for Regulatory Compliance:

Utilise AI-powered platforms to automate compliance monitoring and reporting.
Focus on relevant frameworks like FCA’s Operational Resilience Policy for SMEs.
Conduct proof-of-concept testing for disaster recovery and operational resilience.

ESG Technology Assessment: A Growing Imperative

ESG (Environmental, Social, and Governance) considerations are now integral to PE investments. A significant 93% of firms integrate ESG factors into pre-acquisition due diligence [6]. Technology plays a crucial role in ESG monitoring and reporting. ESG technology assessment is a vital frontier in due diligence, mitigating reputational and regulatory risks.

Technology due diligence must now assess ESG-related technology capabilities, including data collection, analysis, and reporting systems. While standardised ESG data remains a challenge, expertise in ESG technology assessment is essential.

PE firms must evaluate whether target companies possess the right technology for accurate and efficient ESG data management. Emerging best practices in ESG technology assessment extend beyond basic data collection, including integrating ESG and technology risk assessments and using advanced analytics and AI for deeper insights [24].

For SMEs in financial services, integrating ESG considerations can begin with leveraging AI and big data to enhance ESG data collection and reporting, aligning with investor expectations and regulatory trends [14]. Platforms like Clarity AI and Briink offer AI-driven tools to streamline ESG data collection and analysis, providing comprehensive insights into ESG performance [17].

ESG technology assessment is about future-proofing investments, aligning with evolving investor and societal expectations, and increasingly, regulatory mandates.

Key Recommendations for ESG Technology Assessment:

Integrate ESG and technology risk assessments for a holistic view.
Leverage AI and big data for enhanced ESG data collection and reporting.
Assess ESG risks associated with third-party vendors and technology partners.

AI and Advanced Analytics: Evaluating Maturity and Risks

AI and advanced analytics are transforming financial services. However, UK banks are currently lagging behind US and European counterparts in AI adoption [7]. This presents both risks and opportunities. Technology due diligence must rigorously evaluate AI maturity and implementation risks. This includes assessing data quality and algorithmic governance. Realistic value creation potential must be scrutinised.

AI projects can consume significant resources without guaranteed returns. PE firms need to evaluate the current state of AI implementation, ensuring data assets are high quality and well-governed. Robust algorithmic decision-making frameworks are essential.

For SMEs, focusing on AI applications that deliver immediate, measurable ROI is crucial. Productivity gains, portfolio performance metrics, and valuation impact are key KPIs to track when implementing AI [15]. Technology due diligence in AI is about discerning hype from realistic potential, ensuring AI investments yield tangible value and competitive advantage.

Recent case studies highlight the tangible ROI of AI in financial services. WEOKIE Federal Credit Union, for example, reduced call wait times by 50% using Voice AI in its call centre, demonstrating enhanced customer service efficiency [18]. Metro Bank’s partnership with Covecta to deploy AI solutions across its credit businesses has also resulted in a 60-80% reduction in manual work, improving team efficiency and risk analysis [19].

Generative AI is projected to drive significant productivity gains in banking operations, with potential gains of up to 46% in Indian banking operations by 2030 [25].

Key Recommendations for AI and Analytics Assessment:

Focus on AI applications with measurable ROI for SMEs.
Evaluate data quality and algorithmic governance in AI implementations.
Scrutinise realistic value creation potential from AI projects.

Global Scalability: Infrastructure for International Growth

Global scalability is crucial for PE investments with international ambitions. Nearly two-thirds of Europe’s unicorns are UK-based, yet many struggle to scale globally [8]. Technology infrastructure must support global operations. Technology due diligence must assess global scalability, ensuring systems can operate across multiple jurisdictions and meet diverse regulatory requirements. Robust technology support for international business operations is essential.

Regulatory, cost, and talent barriers impede global scaling [8]. PE firms must evaluate whether systems can adapt to different regulations and support multi-language and multi-currency transactions. Integration with local payment systems and scalability to handle increased transaction volumes are critical.

Global scalability assessment ensures future growth is not constrained by technology, enabling seamless international expansion. For SMEs aiming for global reach, cloud technologies offer scalable infrastructure and reduced upfront costs, providing agility and scalability needed for international expansion [16].

Resistance to organisational change frequently undermines technology modernisation initiatives. Effective technology due diligence must assess cultural readiness for change and identify potential barriers to adoption. Change management capabilities are as crucial as technical capabilities when evaluating scalability potential.

Key Recommendations for Global Scalability Assessment:

Assess technology infrastructure’s ability to support global operations.
Evaluate change management readiness within the organisation.
Consider cloud technologies for scalable and cost-effective global expansion.

“Tech skills are essential across all industries, especially financial services with the increasing adoption in areas such as AI and analytics. A lack of tech proficient staff is holding back the industry from effectively implementing new technologies and is ultimately stunting the growth of many financial services institutions.” - Sheila Flavell, Chief Operating Officer of FDM Group

Digital Skills Assessment: Bridging Capability Gaps

The financial services sector faces a significant digital skills shortage, with 76% of banking executives citing it as a major barrier to transformation. Technology due diligence must evaluate not just systems but the human capabilities required to leverage them effectively.

PE firms should assess their current digital competencies against future requirements, identifying critical gaps that could impede value creation. This evaluation should cover technical skills, digital literacy across the organisation, and leadership capabilities to drive technology-led change.

For SMEs in financial services, developing targeted upskilling programmes and strategic recruitment plans can address capability gaps cost-effectively, ensuring technology investments deliver their full potential value. Emerging best practices for digital skills assessment include adopting scalable eLearning solutions and embracing agile mindsets for digital transformation [26].

Key Recommendations for Digital Skills Assessment:

Implement skills gap analysis as part of technology due diligence.
Develop targeted upskilling programmes to address identified capability gaps.
Consider strategic recruitment plans for critical digital competencies.

Change Management Readiness: Overcoming Implementation Barriers

Even the most promising technology investments can fail without effective change management. Research indicates that 70% of transformation initiatives fail due to employee resistance and inadequate management support. Technology due diligence must evaluate organisational readiness for change, including leadership commitment, communication frameworks, and historical patterns of technology adoption.

This assessment helps identify potential implementation barriers before they impact value creation. For financial services firms, developing robust change management frameworks that address cultural factors and provide clear benefits to end-users can significantly improve technology adoption rates and ROI.

Shielding Investments with Diligize

In financial services, thorough technology due diligence is crucial for distinguishing between value-creating and value-destroying investments. The hidden risks—from cybersecurity vulnerabilities and legacy system debt to regulatory non-compliance and ESG shortcomings—can significantly erode returns if overlooked.

Effective technology due diligence demands deep expertise and a tailored approach, particularly for the specific needs of financial services firms.

Diligize provides specialised technology advisory services, empowering PE firms to make informed investment decisions. Our approach mitigates risks and enhances operational efficiency, specifically addressing the pain points of legacy system integration, cybersecurity vulnerabilities, and regulatory complexities.

Diligize delivers comprehensive technology risk analysis, uncovering hidden issues and ensuring alignment with investment goals. Our cybersecurity excellence safeguards sensitive data and protects portfolio value, utilising frameworks like NIST CSF and ISO 27001 [10].

We leverage AI to unlock growth potential in portfolio companies, focusing on measurable KPIs such as productivity gains and valuation uplift [15]. Our post-merger integration expertise ensures seamless technology transitions, and we offer cost-effective solutions without compromising quality.

Are you confident that your current technology due diligence process uncovers all hidden risks in your financial services investments? Partner with Diligize to shield your PE investments from hidden risks. Ensure technology drives value creation, not value erosion, and navigate the complexities of financial services M&A with confidence.

Book a complimentary consultation today to discover how our tailored technology due diligence approach can protect your next financial services investment from hidden risks and enhance post-acquisition value creation. Contact our team for a confidential consultation.

Our Opinion

A robust approach to technology due diligence is not merely advisable but fundamental for safeguarding investments. The digital industry presents both immense opportunities and considerable, often concealed, risks. Cybersecurity vulnerabilities, the burden of legacy systems, and the ever-evolving regulatory environment demand a meticulous and proactive strategy. We firmly believe that a superficial assessment is insufficient. A truly effective due diligence process must delve deep, employing advanced techniques and expert insight to uncover potential pitfalls before they can undermine value creation. This comprehensive approach is the cornerstone of responsible investment in the modern financial ecosystem.

Our strategic direction at Diligize is predicated on providing precisely this level of thoroughness and expertise. We champion the integration of AI-powered tools to enhance the speed and depth of our analyses, ensuring no stone is left unturned. Furthermore, we recognise that technology is only one part of the equation. Organisational readiness for change and the availability of appropriate digital skills are equally critical for success. Therefore, our methodology encompasses not only technical evaluations but also assessments of cultural preparedness and talent capabilities. By addressing all facets of technology risk and opportunity, Diligize empowers private equity firms to make informed decisions and secure lasting value from their investments in financial services.

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Author Bio

Steve Denby is a Senior Partner at Diligize, based in London. With 28 years in managed IT services, Steve specialises in technology due diligence for private equity and rapid-growth firms. His expertise in M&A and studies at Imperial College Business School ensure clients minimise risk and maximise value in technology-driven investments.