The decade of cheap money is over, and private equity is repricing its entire business model. For sponsors that built returns on leverage and multiple expansion, the recalibration is painful. For those who never forgot that PE is fundamentally about building better businesses, it is an opportunity.
Key Takeaways
- Multiple expansion is no longer available as a return driver — value creation must come from operations
- Sponsors with strong operating partner capabilities are widening their performance gap over peers
- Revenue growth, not cost-cutting, is now the primary lever for premium exits
- Strong management teams can help portfolio companies turn value creation plans into practical action
The End of Financial Engineering
From 2010 to 2022, PE returns were significantly supported by three tailwinds that have now reversed: declining interest rates, multiple expansion, and abundant exit liquidity.
The reversion to fundamental value creation is not a temporary adjustment. Structurally higher rates, tightened credit markets, and a more discerning buyer pool will persist. Sponsors that cannot demonstrate genuine operational improvement — in revenue, margins, and competitive positioning — will face difficult exit environments regardless of hold period.
"The sponsors outperforming today did not change their strategy. They were always operationally focused — the rate environment simply exposed everyone else."
— Karter McKinley
A New Playbook for Value Creation
The sponsors generating premium returns in the current environment share three characteristics: they have deep sector expertise that allows them to identify non-obvious value creation opportunities at acquisition; they have operating partner teams that are genuinely embedded in portfolio companies rather than advisory; and they prioritise revenue growth over cost reduction as the primary value creation lever.
- Commercial excellence: Systematic improvement of pricing, sales effectiveness, and go-to-market execution
- Technology-enabled productivity: AI and automation deployed in core operations, not just back-office functions
- Organic growth acceleration: Building the commercial infrastructure for growth rather than relying on acquisition for scale
- Management quality: Active effort to upgrade leadership talent as part of the value creation thesis
Implications for the 2026–2028 Vintage
Funds deploying capital in the current vintage have a genuine advantage: entry multiples have compressed, creating more room for value creation to drive returns. The constraint is execution capability. Sponsors who can consistently operate businesses better — growing revenue, expanding margins, and positioning for strategic exit — are well-placed for superior performance in the next cycle.
