Most PE-backed boards rate their governance as adequate for the business they are running. Institutional acquirers and IPO underwriters apply a different standard, and the gap between the two is showing up in due diligence.
The timing sharpens the point. Private equity is holding 32,000 unsold portfolio companies worth $3.8 trillion, the largest exit backlog the industry has recorded. Distributions have stayed below 15% of net asset value for four years running, a multidecade low last matched in the 2008 crisis (Bain, Private Equity Outlook 2026). Sponsors are under real pressure to sell. Buyers are under no matching pressure to buy.
That asymmetry decides who gets paid in full. Global M&A reached $5.1 trillion in 2025 (J.P. Morgan, 2026 Global M&A Annual Outlook), but the strong assets cleared and the rest were chipped or stalled. Bain names the two most common deal obstacles of last year as inflated seller expectations and diligence red flags: poor earnings quality, customer churn and the governance weaknesses that travel with them. The deals that closed did so into buyer diligence that reviewed governance against the standard the buyer would inherit as owner, a tougher test than the one the sponsor applied.
Those two standards are not the same.
What the hold-period governance standard was built for
During the hold period, governance serves the sponsor. Board composition, risk architecture and reporting are built for the information the sponsor needs and the risk the sponsor carries: performance monitoring, downside protection, strategic direction, management accountability.
Institutional acquirers, strategic buyers and IPO underwriters want something else. They want evidence of how decisions were made, documented and challenged, beyond the outcomes alone. They want board composition that meets the independence and expertise their own frameworks demand. They want risk architecture that survives their own risk committees and external advisers.
BCG’s 2026 infrastructure work puts governance ahead of revenue growth and operational efficiency as the primary value driver in private infrastructure transactions. The governance that gets an asset to exit is frequently not the governance that gets it through diligence.
Merger governance failures have a documented cost
The largest shareholder derivative settlements in US corporate history, catalogued by Kevin LaCroix of The D&O Diary, include a category for M&A process failures. Bank of America’s acquisition of Merrill Lynch and Activision Blizzard both sit on that list. Transaction governance that looked adequate during the deal became inadequate under the scrutiny of acquirer diligence and the shareholder challenge that followed.
PE exits face the same dynamic. Governance built to run the business rarely survives the combined scrutiny of a vendor due diligence process, an acquirer’s governance review team and the shareholder base that will own the combined entity.
The 12 to 24 month window
Governance uplift is worth most in the 12 to 24 months before exit. Once a diligence team has found the gaps, the cost of closing them has already risen: deal momentum creates time pressure, and remediation under scrutiny costs more than remediation planned in advance. Some gaps do not close at diligence speed at all. Board composition and the absence of a documented decision trail cannot be manufactured in the weeks a live process allows.
The Pre-Exit SGaaS tier applies the Red Team Protocol™ and the Pre-Mortem Diagnostic™ to the governance architecture before an institutional buyer does. The Red Team Protocol subjects the board’s governance assumptions to the same structured adversarial challenge an acquirer’s risk committee will bring. The Pre-Mortem Diagnostic works back from the likely diligence failure modes to establish what the governance record needs to show, and then to close the gaps it leaves.
The question an acquirer’s team asks is precise: what do the board papers show about how material decisions were challenged, not just approved? For most PE-backed boards, the answer is less clear than the board assumes.
The question to ask before the process starts
The governance review inside due diligence is expensive, time-pressured and run by people whose interests are not aligned with yours. The review you commission 18 months out carries none of those constraints.
What would an institutional diligence team find in your board papers today? What does your governance record show about how risk was surfaced, how challenge was raised and how the board documented its reasoning on material decisions? Those questions have answers. The Pre-Exit SGaaS tier is built to surface them and close the gaps before the process does.
From the SGaaS White Paper
The Pre-Exit chapter, in full
The white paper sets out the full Pre-Exit architecture and the governance gaps that typically surface at exit, from board composition to the documented decision trail an institutional buyer's diligence team will test.
Owen Vallis is the founder of Marentis Labs, the firm that originated Strategic Governance as a Service. He spent ten years as UK Head of Fiduciary Risk Management at Credit Suisse and holds active board roles in the charity and education sectors. Schedule a confidential discussion.