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Operational value creation for private equity firms is now less straightforward than it used to be and strategies to achieve the desired return on investment have had to adapt as a result. Higher valuations, greater competition and budget constraints mean GPs’ focus has instead switched to improving companies in ways that are more measurable, durable and less dependent on market conditions.
New research from Alvarez & Marsal has revealed a recent change in strategy – prior to 2023, portfolio companies generated most of their EBITDA growth through top-line expansion. A new approach has since been adopted with margin improvement accounting for 51% of EBITDA growth of companies exited in 2025, more than double the same proportion in 2023. Alvarez & Marsal also found multi-lever value creation is now the baseline, with 43% of GPs balancing revenue and cost mixes.
The path to value is also influenced by the scrutiny these investments receive. Under their shareholding agreements with GPs, portfolio companies are usually required to provide regular reporting updates and Christian Mitchell – managing partner at UK-based valuations firm North Star Partners – is seeing this becoming increasingly standardized through the use of portfolio management software. A key driver, he sees, has been LPs’ increasing desire for transparency with regard to portfolio performance.
“The ILPA (Institutional Limited Partners Association) Portfolio Company Template is currently undergoing a refresh to reflect this, with the updated version expected to include more standardized reporting of portfolio company KPIs to LPs,” explains Mitchell. “It isn’t a regulatory requirement, but institutional LPs increasingly treat ILPA formats as the baseline, which in turn means that GPs are becoming more disciplined and consistent in how they collect data upstream.”
Standardization may help investors generate clearer pictures of their portfolio companies but this may not actually help from a value generation perspective. Dashboards may be able to track various milestones and metrics but George Davies – CEO at ēventūs.do – says it’s important to map attribution when it comes to value management. A portfolio company’s profit could rise after its investment but this may not necessarily be because of the GP’s intervention.
“That gap matters more now than it used to, because LPs started asking for evidence of returns by source, and multiple expansion is no longer there to cover an unprovable story,” adds Davies.
Identifying the right KPIs is an important part of a GP’s investment strategy, though it can take time for this to come through. The most important KPIs are those that test whether the value-creation thesis is working and if improvement is durable. This can often involve delving a bit deeper.
“Some milestones may look great from the outset, but being able to discern what these figures means in reality can be of greater relevance to GPs. Dashboards are now offering unparalleled insights for investors and Davies advocates a simpler, more meaningful approach – picking less KPIs but the ones that tell the most accurate story.
“Net revenue retention is a strong one, because it captures whether the value you deliver is translating into expansion rather than churn,” says Davies. “Gross margin movement on existing contracts is another, because it shows if you are capturing the value created or giving it away.”
Recent advances in technology have seen AI increasingly become a source of operational value creation. FTI’s most recent Private Equity Value Creation Index found that 66% of private equity professionals surveyed saw AI as delivering a tangible impact in the next 12 months, nearly double who felt the same the year before. However, adoption has been slow and nearly half of respondents admitted to mixed success with implementation.
“The firms seeing the biggest improvements picked two or three initiatives where the economics were clear and executed well,” explains Tobias Haefele, co-founder at Riplo, a startup designing an agentic operating system for private equity firms. Importantly, Haefele says AI is not a magic wand that can be waved after an investment is made and instead needs to be consciously figured into pre-investment decisions.
“The old model of buy the asset, then spend six months figuring out an operational plan, isn’t really feasible anymore,” he adds. “Most of what determines whether AI works is fixed before you own the company (data quality, system architecture, engineering capacity etc). You can’t sort that out in a hundred days, so it has to be priced at signing.”
From his perspective, Mitchell has seen mixed success when it comes to the operational impact of AI in portfolio companies. He sees benefits as falling into two categories – cost reduction and revenue generation – and while there has been success in the former, he argues the latter is more complicated.
“Investors are very good at what they do, which is spotting an opportunity in the market, adding value to a business and selling it, but they are not necessarily AI-native themselves,” says Mitchell. “Most established their edge in a pre-AI world, so AI-native operating models do not always come naturally to them. This is even the case at certain software funds where you might expect a higher degree of AI-fluency.”
The private equity industry swelled off the back of tried and tested value creation models, but the go-to strategies of yesterday are no longer the obvious route and GPs of all sizes are having to think differently. Fortunately, this disruption is leading to new innovations around value creation and the use of AI are offering new opportunities to GPs and LPs alike.
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