In the decade leading up to 2022, the rising tide of booming markets lifted virtually all boats—including the private equity industry. But now that volatility has returned to markets, strong returns might not come as easily to many general partners (GPs).
That’s because the private equity industry has largely relied on market factors for value creation. But with the protracted era of rallying markets behind us, GPs can no longer count on multiple expansion to drive returns.
This trend sheds light on our third and final step to private equity investing: creating value through operational improvements. After identifying high-quality businesses and acquiring them for value, improving their operations is critical to enhancing cash flows. Here, we demonstrate how improving the operations of portfolio businesses can drive the majority of private equity value creation—and how it’s best approached with an established, repeatable playbook.