Fractional CTOs: Unlocking Value in UK Midmarket PE.
Private equity finds itself at an inflection point. With distributions falling to their lowest levels since 2009 and firms sitting on a record $2.6 trillion of committed but uninvested capital globally¹, the traditional playbook of financial engineering and rapid exits has become increasingly obsolete.
As The Economist recently noted, PE funds are returning just 3.3% of investment value quarterly, well below the long-term average of 5.6%². This challenge is particularly acute in the UK midmarket, where approximately 400 private equity firms compete for deals, with transaction volumes falling 23% in 2024 compared to the previous year³. In this environment of extended hold periods and constrained exit opportunities, operational value creation has shifted from nice-to-have to essential.
The pressure is particularly acute for PE-owned software companies, which have faced a perfect storm of challenges. SaaS valuations have contracted sharply, with public market revenue multiples falling from peaks of 20x+ in 2021 to below 5x for many companies by late 2024⁴. Leadership teams across PE portfolios are grappling with existential questions about AI integration while defending against encroachment from major technology platforms that release competing features with each product cycle⁶.
The Midmarket Transformation
A clear transformation is underway in the UK midmarket, where funds are establishing dedicated technology practices and recruiting operating partners with deep technical credentials. With midmarket funds accounting for approximately 60% of all UK PE transactions by volume⁷, the competitive pressure to differentiate through operational excellence has never been greater.
Leading funds are building multi-disciplinary operating teams that combine technology expertise with procurement, supply chain, and commercial capabilities. Unlike traditional IT management—focused on maintaining systems and managing help desk tickets—modern strategic CTOs operate at the intersection of technology and business strategy.
The economics are compelling. Where funds previously relied on expensive consulting engagements that often delivered generic recommendations, internal technical expertise can provide focused, actionable insights at a fraction of the cost. This shift from external consulting to internal capability building represents a fundamental change in how midmarket funds approach operational value creation.
The Three-Phase Integration Model
The most successful midmarket firms are embedding CTO partners across three critical phases of the investment lifecycle:
Pre-acquisition assessment goes far beyond traditional IT audits. Technical operating partners evaluate architectural scalability, identify technical debt that could impede growth, and assess the technology team's capability to execute ambitious expansion plans. This granular understanding often reveals value creation opportunities—and risks—that purely financial analysis would miss.
Post-acquisition integration represents where many deals are won or lost. CTO partners provide crucial stabilisation during the vulnerable first 100 days, when system failures or team departures can derail the entire investment thesis.
Value creation phase enables portfolio companies to undertake transformational initiatives that would otherwise be prohibitively risky. Whether cloud migration, digital product development, or platform modernisation, these projects require seasoned technical leadership that can navigate complex implementations while maintaining operational stability.
Building Systematic Capabilities
The challenge for UK midmarket principals lies not in recognising the value of technical expertise, but in developing systematic approaches to leverage it effectively. The most successful firms are establishing clear protocols for when and how to deploy CTO partners—whether through fractional CTO models that can scale across multiple portfolio companies, rapid technical assessments for smaller deals, or comprehensive transformation planning for larger acquisitions.
The economic model for technical operating partners differs significantly from traditional consulting arrangements. Rather than project-based engagements, successful funds are implementing retainer-based relationships where technical experts maintain ongoing oversight across multiple portfolio companies.
With longer hold periods now the norm, the quality of operational execution directly determines returns. A portfolio company that emerges from a three-to-five-year hold period with modernised technology infrastructure and enhanced digital capabilities commands significantly higher multiples than one that merely maintained the status quo.
The Secondary Market Implications
The integration of sophisticated technical capabilities also creates advantages in secondary transactions, where PE firms increasingly sell portfolio companies to other PE firms rather than strategic buyers or public markets. In these transactions, the ability to demonstrate concrete technological improvements and clear digital transformation roadmaps becomes a key differentiator.
Funds with strong technical operating capabilities can present compelling growth stories to potential buyers, backed by concrete evidence of technological foundation building and clear plans for future value creation. This narrative advantage often translates directly into higher exit multiples, as buyers recognise the reduced execution risk associated with professionally managed technology transformations.
As private equity continues to evolve beyond its financial engineering origins, the integration of sophisticated technical operating capabilities represents a fundamental shift in how value is created and captured. For UK midmarket firms operating in an increasingly competitive landscape, the question is no longer whether to embrace this transformation, but how quickly they can build the expertise to compete effectively.
The firms that master this integration will find themselves with a significant competitive advantage in the UK midmarket. Those that do not risk being relegated to an increasingly crowded field of capital providers offering little beyond financing.
References
- The Economist. What it means to be illiquid. Special Report: Trapped Capital (2025).
- British Private Equity & Venture Capital Association (BVCA). Private Equity and Venture Capital Report 2025. BVCA (2025).
- Bessemer Venture Partners. State of the Cloud 2024. Bessemer Venture Partners (2024).
- PitchBook. Global SaaS Report 2024. PitchBook (2025).
- McKinsey & Company. The Age of AI: Implications for Software Companies. McKinsey & Company (2024).
- British Private Equity & Venture Capital Association (BVCA). Market Activity Report 2024. BVCA (2025).
- EY. UK Private Equity Trend Report 2024. EY (2024).
- PitchBook. UK PE Breakdown 2024. PitchBook (2025).
- Unquote Intelligence. UK Midmarket Activity Report Q1 2025. Unquote Intelligence (2025).
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