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 no longer works.
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 is especially sharp 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. Hold periods are longer. Exits are harder. The funds that generate returns now are the ones that can actually improve the businesses they own.
“Operational value creation has shifted from nice-to-have to essential. The firms that master technical integration will find themselves with a significant competitive advantage.”
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. 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 pressure to differentiate through better operations is real and growing.
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 provides focused, actionable insights at a fraction of the cost. This shift from external consulting to in-house capability is already changing how midmarket funds run their portfolios.
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 is where many deals are won or lost. CTO partners provide crucial stabilisation during the first 100 days, when system failures or team departures can derail the entire investment thesis.
Value creation phase enables portfolio companies to take on transformational initiatives that would otherwise be too risky. Cloud migration, digital product development, platform modernisation — these projects require seasoned technical leadership that can deliver complex implementations without breaking what already works.
Building Systematic Capabilities
Most midmarket principals already recognise the value of technical expertise. The harder question is how to deploy it systematically. The most successful firms have clear protocols for when and how to use CTO partners — fractional models that scale across multiple portfolio companies, rapid technical assessments for smaller deals, or full transformation planning for larger acquisitions.
The economics differ from traditional consulting. Rather than project-based engagements, successful funds use retainer-based relationships where technical experts maintain ongoing oversight across several 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 with modernised technology and stronger digital capabilities commands higher multiples than one that merely kept the lights on.
“With longer hold periods now the norm, the quality of operational execution directly determines returns.”
The Secondary Market Implications
Strong technical capabilities also create advantages in secondary transactions, where PE firms increasingly sell portfolio companies to other PE firms rather than to strategic buyers or public markets. In these deals, the ability to show concrete technological improvements and a clear roadmap matters. It is often the difference between a competitive process and a discount.
Funds with genuine technical depth can present credible growth stories to buyers, backed by evidence of real infrastructure work and clear plans for what comes next. Buyers pay more when they can see that technology risk has been professionally managed — not just talked about in a slide deck.
Private equity is moving beyond its financial engineering origins. For UK midmarket firms, operational value creation is now the main lever for returns. The funds that build real technical capability across their portfolios will win better deals, hold better companies, and exit at better multiples. The rest will find themselves competing on price alone.
Related Reading
- Fractional CTO Services — how we deliver fractional CTO engagements across PE portfolios
- Technology Audit — pre-acquisition and post-investment technology assessment
- For Private Equity — our services for PE investors and operators
Frequently Asked Questions
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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