5 Cloud Red Flags PE Firms Miss During Due Diligence
Most private equity firms have rigorous financial and legal due diligence processes. But when it comes to cloud infrastructure, even sophisticated investors routinely miss warning signs that can translate into hundreds of thousands -- or millions -- of dollars in hidden costs. After working with hundreds of PE-backed companies during my time as an AWS Principal Solutions Architect, I have seen the same five red flags appear again and again. Here is what to look for and why each one matters to your bottom line.
Red Flag #1: No Cost Allocation Tagging
When I audit a target company's AWS environment, the first thing I check is their tagging strategy. Cost allocation tags are metadata labels attached to cloud resources that allow you to attribute spending to specific teams, products, environments, or customers. Without them, you are flying blind.
Here is the financial reality: if a company cannot tell you how much it costs to run each product line, each customer segment, or each environment (production vs. development vs. staging), they have no meaningful ability to make informed decisions about cloud spending. I have seen companies where fewer than 20% of resources had any cost allocation tags at all. In one memorable case, a SaaS company with $4M in annual cloud spend could not attribute $2.8M of that spend to any specific product or customer.
Why it matters for PE: Without cost attribution, you cannot accurately model unit economics, you cannot identify which customers or products are margin-positive, and you cannot build a credible optimization roadmap. This is not just a technical gap -- it is a financial visibility problem that will persist well into your hold period unless addressed.
Red Flag #2: Single-Account Sprawl
AWS best practices call for a multi-account architecture using AWS Organizations. Each workload, environment, and team should have its own isolated account within a well-structured organizational hierarchy. Yet I routinely encounter companies running everything -- production, development, staging, data science experiments, personal sandbox projects -- in a single AWS account.
Single-account sprawl creates three immediate problems. First, you lose blast radius containment: a misconfiguration in a development environment can impact production. Second, you lose cost visibility: without account-level separation, disentangling spending by environment or team requires sophisticated tagging (see Red Flag #1). Third, you make security and compliance exponentially harder: IAM policies become Byzantine, and audit trails become tangled.
Why it matters for PE: Single-account environments are a strong signal of immature cloud governance. Remediation is disruptive and time-consuming -- typically 3-6 months for a clean migration to a multi-account structure. Factor this into your post-acquisition integration timeline and budget. I have seen remediation costs range from $150K to $500K depending on complexity.
Red Flag #3: No Reserved Instance or Savings Plan Coverage
AWS offers significant discounts -- typically 30-60% off On-Demand pricing -- in exchange for one- or three-year usage commitments through Reserved Instances (RIs) and Savings Plans. If a target company is running stable, predictable workloads entirely on On-Demand pricing, they are leaving money on the table every single month.
The math is straightforward. A company spending $200K per month on EC2 On-Demand instances for workloads that run 24/7 could save $60K-$120K per month by purchasing appropriate commitments. That is $720K to $1.44M in annual savings, flowing directly to EBITDA.
Why it matters for PE: The absence of commitment-based pricing is often the single largest quick-win opportunity in cloud optimization. But it also signals a lack of financial discipline around cloud spending. During diligence, ask for the target's RI/Savings Plan coverage ratio. Anything below 50% coverage for stable workloads is a red flag -- and an opportunity.
Red Flag #4: No Autoscaling Configuration
Autoscaling is one of the fundamental advantages of cloud computing: the ability to automatically add capacity when demand increases and remove it when demand subsides. Yet a surprising number of companies run fixed-size infrastructure that was sized for peak load and left there permanently.
I have audited environments where servers provisioned for a Black Friday traffic spike in 2022 were still running at that capacity in 2025. The company was paying for peak capacity 24/7/365, even though actual peak utilization occurred for perhaps 200 hours per year. The waste factor can be enormous -- I have seen environments where average utilization was below 15%, meaning 85% of compute spend was pure waste.
Why it matters for PE: The absence of autoscaling is a clear indicator of a "set it and forget it" operations culture. This typically correlates with other forms of cloud waste and suggests that the engineering team has not been held accountable for infrastructure costs. Implementing autoscaling properly requires application architecture changes, not just configuration -- budget 2-4 months for meaningful improvements.
Red Flag #5: Deep Vendor Lock-In Without Strategic Justification
There is an important distinction between intentional use of managed services (which can reduce operational overhead and accelerate development) and accidental vendor lock-in that creates migration risk and eliminates pricing leverage. Look for heavy reliance on proprietary services without documented architectural decision records.
Warning signs include: heavy use of vendor-specific serverless orchestration, proprietary database engines with no data portability plan, and custom integrations that would require complete rewrites to move to an alternative provider. I have seen companies where the estimated cost to migrate away from a single cloud provider exceeded $5M -- a material consideration for any exit scenario.
Why it matters for PE: Lock-in limits your strategic options. If you are planning a hold period of 3-5 years with an exit to a strategic buyer, that buyer may have a different cloud strategy. Lock-in that constrains exit options or creates integration complexity can directly impact your exit multiple. At minimum, ensure the target has documented their architectural dependencies and has a theoretical migration path, even if they never intend to use it.
The Bottom Line
None of these red flags are deal-breakers in isolation. But they are material factors that should inform your valuation model, your post-acquisition integration plan, and your expected timeline to EBITDA improvement. The companies that address these issues proactively -- before they hit the market -- command better multiples. The companies that do not create opportunities for PE firms willing to do the work.
The key is knowing what to look for. Add these five checks to your technical due diligence process, and you will catch issues that most firms miss entirely.
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