Private Equity Value Creation

Private equity value creation is what a fund does after it buys a company to make that company worth more. Over the next three to seven years, the general partner (GP) and the management team try to grow earnings before interest, tax, depreciation and amortization (EBITDA), improve the cost base, or buy smaller companies and combine them. Then the fund sells.

Bain & Company's Welcome to a New Era in Private Equity essay, part of the 17th Global Private Equity Report (23 February 2026), is the current bar. In a typical 2015 buyout, about half the price was borrowed at 6 to 7 percent, multiples were still climbing, and roughly 5 percent annual EBITDA growth could underwrite a 2.5x multiple on invested capital (MOIC) over five years. Today borrowing costs sit in the 8 to 9 percent range, leverage is closer to 30 to 40 percent of enterprise value (about 36 percent in Bain's illustration), and purchase multiples are high and stagnant. The same 2.5x now needs something closer to 10 to 12 percent annual EBITDA growth. Bain calls that "12 is the new 5."

A leveraged buyout (LBO) is the purchase. Value creation is what you do while you own the company.

Why 2026 deals need operating gains

The 2010s were kind to anyone who bought a decent company and waited. Low rates pushed multiples up. Cheap debt magnified the equity claim. Average holds were shorter, so cash came back to limited partners (LPs) in time to commit to the next fund. Bain says rising multiples powered more than 50 percent of buyout returns in that decade.

That loop has stopped. Buyout funds sit on $3.8 trillion of unrealized value. Average holding periods at exit have drifted toward seven years. Distributions as a share of net asset value have stayed weak. A 2.5x that takes seven years instead of five is about 14 percent internal rate of return (IRR), not 20 percent.

Leverage did not disappear, and some exits will still clear a higher multiple than the entry. Those two things are no longer a plan. Bain's 2015 illustration assumed 10.0x in and 12.5x out. The 2025 illustration assumes 14.0x in and 15.0x out. One turn of expansion on a more expensive company does less work, and you cannot underwrite the next turn. Full-potential diligence (revenue, operations, technology) is how you know whether a 12 percent earnings path exists before you bid. Hg's take-private of OneStream in January 2026, at about $6.4 billion with minority capital from General Atlantic and Tidemark, is Bain's example: years of watching the company, then one combined commercial, technical, and product inquiry, so the bid was a view of what the asset could be.

How the mix of returns has changed

Returns still come from the same three places they come from at close: more EBITDA, a different multiple, and less net debt. What changed is the mix.

McKinsey's Global Private Markets Report 2025, Braced for shifting weather (May 2025), cites StepStone Group on 3,056 realized buyouts entered from 2010 through 2022. Leverage and market multiple expansion were 61 percent of those returns. Revenue growth and EBITDA margin expansion were the other 39 percent.

A longer sample says the same thing on a different clock. CAIS, in How Do Private Equity Firms Create Value?, reports Institute for Private Capital work on 2,951 fully exited deals from 1984 through 2018 (a StepStone proprietary set, about $945 billion of equity). Leverage was 70 percent of value creation before 2000. After 2008 it was 25 percent. Operational improvement (revenue plus margin) was the most consistent contributor across those three eras. Market multiple expansion was 25 percent of value creation in the post-crisis years and negative before 2000. You can try to earn a higher multiple by changing what the company is. You cannot underwrite the market.

Steven Kaplan and Per Strömberg, writing in the Journal of Economic Perspectives in 2009 (Leveraged Buyouts and Private Equity), split the work into the capital structure, the board and incentives, and the operating plan. A later survey of 79 firms (more than $750 billion under management) by Paul Gompers, Kaplan, and Vladimir Mukharlyamov (What Do Private Equity Firms Say They Do?, 2016) found that increasing revenue showed up in more than 70 percent of deals, follow-on acquisitions in more than 50 percent, and cost cuts in 36 percent before close and 47 percent after.

A specialty distributor in the hold earns $12 million of EBITDA. The fund pays 11.0x, so enterprise value is $132 million. New debt is 4.0x EBITDA, $48 million. Sponsor equity is $84 million.

Hold five years. EBITDA grows about 12 percent a year, from $12 million to $21 million. Exit at the same 11.0x. No multiple expansion. Free cash flow pays debt down from $48 million to $20 million.

The fund put in $84 million and took out $211 million. MOIC is 2.51x. That is the 2.5x target on a five-year clock, earned almost entirely on earnings and paydown. The $127 million of equity gain splits $99 million from EBITDA ($9 million of extra earnings times 11.0x) and $28 million from principal that disappeared. Multiple expansion created nothing.

The operating plan that produces the extra $9 million of EBITDA is the value creation plan, not the purchase agreement. On this company it is four lines: raise catalog prices 3 percent on $80 million of sticky revenue (about $2.2 million of EBITDA if most of the increase drops through); close two overlapping warehouses ($1.5 million); buy one $4 million-EBITDA add-on at 7.0x and take $0.8 million of procurement out of the combined cost base; lift sales productivity for the rest ($0.5 million). If those four miss, the 2.51x misses.

The value creation plan

A value creation plan (VCP) is the document that turns the investment thesis into owners, numbers, and dates. It is not a strategy memo that sits in the data room. It is not the 100-day plan, which is the first slice of the same object.

A complete plan names:

• The thesis. One or two beliefs that justify the price. If you cannot say them in a sentence, you do not have a plan.
• Four to seven initiatives, not twenty. Each traces to a driver: revenue, margin, an add-on, or a risk you are taking off the table.
• One owner per initiative, inside management if you can, with an operating partner sitting beside the ones that need it.
• A baseline agreed in diligence. Day-one EBITDA, margin, revenue mix, and the operating key performance indicators (KPIs) you will actually look at. Arguments about the baseline after close are how plans die.
• A target, a budget, and a date for each line.
• A risk and a kill criterion. If the warehouse consolidation needs a second year, say so. If the add-on pipeline is empty in month six, the plan has to change.
• The exit the company is being built for. A strategic buyer, another fund, or a public listing will not pay for the same story.

The plan is written in diligence. A plan drafted before close informs the price and the first Monday. A plan drafted in month four is a recovery document.

Most firms run a red/amber/green view of each initiative at the quarterly board, with a monthly operating review on the lines that are off. The first 100 days are for the baseline, the team, and the quick wins (price, obvious cost, reporting). Years one and two are for the initiatives that have to show up in EBITDA. Years three and after are for scale, the remaining add-ons, and a file a buyer can underwrite. Holds that slip toward seven years, which is Bain's current average at exit, are extra years of this cadence.

Plans stall for ordinary reasons. The CEO never shared the thesis. Functions run their own lists. The leadership team that got the company to $12 million of EBITDA is not the team that gets it to $21 million. The metrics cannot be produced on time, so no one is accountable.

Revenue, margin, and buy-and-build

Three operating levers show up in almost every plan. Financial engineering (the mix of debt and equity, a refinance, a dividend) still moves equity value. It is a worse substitute for earnings than it was in 2015.

Revenue. Price, mix, sales-force effectiveness, new products, new geographies. Price is usually the fastest line because most of a price increase drops through to EBITDA if volume holds. McKinsey, in Pricing: The next frontier of value creation in private equity, finds that a 1 percent price rise lifts profits about 6 percent at a typical midsize US company, against about 4 percent from a 1 percent cut in variable costs and about 1 percent from a 1 percent cut in fixed costs. On portfolio companies where a pricing program is likely to work, they typically see 3 to 7 percent margin expansion within a year. Volume takes longer. In the distributor example, the 3 percent catalog increase is most of the first-year earnings gain, and only if customers stay.

Margin. Procurement, sites, working capital, systems, a cost base that does not grow as fast as sales. Warehouse consolidation in the same example is $1.5 million because two buildings were doing one job. Working-capital release does not raise EBITDA. It raises cash, which is how principal gets paid.

Buy-and-build. A platform company buys smaller companies (add-ons, also called bolt-ons) and tries to run them as one. Scale can cut cost. A larger, less risky, more professional company can also earn a higher multiple than the pieces would have earned alone, if the integration actually happens.

Add-ons are how most buyouts happen, counted one deal at a time. Cherry Bekaert's Private Equity Report: 2025 Trends and 2026 Outlook (25 February 2026), using PitchBook, puts add-on acquisitions at 72.9 percent of all U.S. buyouts in 2025 by count, in line with the five-year average. They are not most of the dollars. McKinsey's 2025 report puts non-platform deals at 40 percent of buyout deal value in 2024. The typical add-on is smaller than the typical platform.

Bain, in Building a Stronger Buy-and-Build (2024 Global Private Equity Report), looked at 44 buy-and-build deals from 2010 through 2019. Platforms that depended on multiple arbitrage alone averaged a 1.4x MOIC. Those with a strategic reason for organic growth or a real margin gain averaged 2.2x.

KKR's Josh Weisenbeck, in the firm's Value Creation in Private Equity: Making Our Own Luck interview (July 2024), describes Capsugel, a 2011 carve-out that mostly made pill capsules. The fund moved a few small delivery technologies into their own unit and bought businesses with more of them, until the company was a drug-delivery platform rather than a capsule plant. That is a change in what a buyer is paying for.

Cinven's hold in Phadia did the same kind of work with a sales force. Invest Europe records the Swedish allergy-diagnostics company bought in 2007, a doubled revenue-growth rate, and earnings from €96 million to €146 million. Thermo Fisher Scientific bought it in May 2011 for €2.47 billion. The fund returned 3.4x and about €1 billion of capital gain. The work was product, the US sales force, and offices in China and India.

Who does the work

Three seats, not one.

The deal team finds the company, sets the price, builds the capital structure, and sits on the board. If the entry multiple is wrong, operations will not save the fund. That is why the deal team is still treated as the center of the firm.

The operating partner (and, at larger firms, a portfolio-operations or value-creation team) is there to make the plan happen. Upper-middle-market funds and megafunds tend to employ these people. Smaller funds often ask the deal team to do both jobs, or they rent an operator for a specific line (procurement, pricing, a plant). McKinsey's 2025 report, from a 2024 survey of operating groups, says average team size has more than doubled in three years. Advisory at a 5 percent earnings bar is a different job from control at 12 percent.

Management runs the company. The plan fails if they do not own the lines. Equity for the CEO and the functional heads is how the GP tries to make that true. Replacing a CEO in the first 100 days is common enough to be a plan item. Keeping a CEO who cannot run a $21 million-EBITDA company is how holds slip.

The same words are also a job title. A value-creation or portfolio-operations team is the group hired to run the plan, not another name for the three-lever bridge. Those teams hire operators and consultants, not first-year bankers. Hours are better than the deal team. Pay is usually a step below it. Promotion onto the investing seat is the exception. The private equity career path is the ladder.

How value creation is measured

At the company, the scoreboard is the plan: EBITDA, margin, revenue, the operating KPIs on each line. A value-creation bridge is the same three buckets used at close, drawn as steps: how much of the equity gain came from earnings, how much from the multiple, how much from paying down debt (and dividends). If the earnings step is small and the multiple step is large, the hold was a market trade.

At the fund, LPs do not live on the company's EBITDA. They live on cash and marks. MOIC is how many times the equity came back. IRR is that multiple with a clock. Distributions to paid-in (DPI) is cash already distributed. An interim 1.8x that is mostly remaining value is a mark, not a distribution. Bain's $3.8 trillion of unrealized buyout value is that problem at industry scale. IRR vs MOIC is the pair.

Common questions

How do private equity firms create value?

They buy a company, usually with debt on that company's balance sheet, then try to grow earnings, tighten the cost base, and (often) buy smaller companies that fit. They sell. Equity value at exit is enterprise value minus remaining net debt. In 2026 the earnings path is the part you can still plan.

What is a value creation plan?

The time-bound document that names the thesis, the four to seven initiatives, the owner of each, the baseline, the targets, and the exit the company is being built for. It is written in diligence and reviewed at the board.

What is operational alpha?

The extra return that comes from running the company better, separate from cheap debt and a rising market multiple. It is a label for the 12 percent earnings job, not a separate asset class.

What are the three drivers of private equity returns?

EBITDA growth, multiple expansion, and less net debt. McKinsey and StepStone's 2010–22 sample attributed 61 percent of realized buyout returns to leverage and multiple expansion. That mix is why the 2026 underwrite has to assume more of the first driver.

How is value creation different from financial engineering?

Financial engineering changes the claim on a given stream of cash (more debt, a refinance, a dividend). Value creation changes the stream. Both move equity. Only one of them is a plan you can still count on.

Sources

Bain & Company, Welcome to a New Era in Private Equity, 17th Global Private Equity Report, 23 February 2026. McKinsey & Company, Global Private Markets Report 2025, Braced for shifting weather, May 2025, Exhibit 18 (SPI by StepStone, 3,056 realized buyouts). CAIS, How Do Private Equity Firms Create Value?, citing Institute for Private Capital on 2,951 exits, 1984–2018. Steven N. Kaplan and Per Strömberg, Leveraged Buyouts and Private Equity, Journal of Economic Perspectives, Winter 2009. Paul Gompers, Steven N. Kaplan, and Vladimir Mukharlyamov, What Do Private Equity Firms Say They Do?, Journal of Financial Economics, 2016. McKinsey & Company, Pricing: The next frontier of value creation in private equity. Cherry Bekaert, Private Equity Report: 2025 Trends and 2026 Outlook, 25 February 2026 (PitchBook). Bain & Company, Building a Stronger Buy-and-Build, 2024 Global Private Equity Report (44 buy-and-build deals, 2010–19). KKR, Value Creation in Private Equity: Making Our Own Luck, July 2024. Invest Europe, Phadia.