Spend any time around private equity right now and you will hear two words everywhere: value creation. And with good reason.
Private equity is sitting on approximately $3.8 trillion in unrealized value across 32,000 unsold portfolio companies, while average holding periods at exit have stretched to nearly 7 years. Distributions to LPs remain well below historical norms, creating pressure to return capital while thousands of companies remain in the exit pipeline.[1]
Longer holds bring their own challenges. Capital stays tied up, management teams have to sustain performance for longer, and some companies will need to refinance debt in a very different interest rate environment than when the original transaction was financed.
Value creation itself isn’t new. Operators have been building value inside businesses for decades. What’s changed is how much of the investment return now depends on it.
I’ve spent the last several weeks digging into recent research from Bain, Alvarez & Marsal, KPMG, EY and others. Each approaches the issue from a different angle, but there is remarkable consistency in what they are seeing.
Bain says “12 is the new 5.” Cheap debt and easy multiple expansion can no longer be counted on to drive returns. Ten years ago, a deal might only require around 5% annual EBITDA growth to achieve target returns. Today, higher purchase prices and a higher cost of capital mean many deals require closer to 12% annual EBITDA growth. Bain also calls for sharper value creation, a data-backed edge, faster from diligence to Day 1 execution and building the systems required to deliver the investment thesis. [1]
Alvarez & Marsal identifies a growing diligence-to-execution gap. 41% of respondents realized less than 75% of planned value creation, while fewer than one quarter fully embedded value creation planning before LOI. A&M points to operating models, playbooks, management bandwidth and execution capacity as critical constraints. [2]
KPMG makes the case for operational alpha, arguing that value creation increasingly depends on systematic, repeatable capabilities. Data, predictive intervention, outside-in intelligence and stronger operating models are becoming part of how firms identify, execute and measure value creation. [3]
EY brings the story full circle with insights about a successful exit. 86% of General Partners say exit preparation improves valuations, with the strongest results realized when preparation begins 12 to 24 months before sale. Buyers increasingly expect a clear, data-backed equity story, prepared management and credible evidence that value has been created and can continue to be created. [4]
Taken together, the research points to a significant shift in how value is created and ultimately realized.
More of the return has to come from the business.
For years, private equity returns benefited from a combination of leverage, multiple expansion, cost optimization and favorable market conditions. Those levers haven’t disappeared, but they can’t be counted on to do as much of the work. [3]
Bain’s “12 is the new 5” captures the new math. More EBITDA growth is required to generate the same level of return, putting much greater pressure on the underlying business to perform. [1] Cost optimization will always matter, but there is a limit to how much value can be created by cutting costs. Growth has to play a bigger role, whether it comes from pricing, new markets, new products, customer expansion, commercial productivity, channels, acquisitions or technology.
Those opportunities may look clear on a spreadsheet. Capturing them inside the business is much harder.
The opportunity is one thing. Executing it is another.
This is where I think the research gets particularly interesting. A value creation plan may identify exactly where the opportunity exists, but that doesn’t mean the organization is equipped to capture it. Accelerating organic growth, entering a new market, improving pricing, integrating acquisitions or deploying AI each require specific capabilities across people, process, structure, technology and data.
A&M puts numbers around this execution problem. Management bandwidth alone accounts for 34% of transformation constraints, and when combined with cross-functional coordination and change resistance, organizational issues account for 65% of transformation constraints. Only 22% of firms have fully standardized value creation playbooks with consistent KPIs across investments. [2]
The growth findings are equally telling. Revenue volume growth is the most commonly cited value creation shortfall, with A&M concluding that plans are missing less because of strategy and more because of execution capacity inside portfolio companies. [2] Identifying a value creation lever and having the organizational capability and capacity to execute it are two very different things.
Value creation has to become repeatable.
KPMG takes this idea further through its work on operational alpha. Operational alpha is the latest terminology for what operators have been doing for decades: building value inside the business. As traditional market tailwinds fade, competitive advantage increasingly comes from the ability to create operating improvements systematically and at scale. [3]
A company can produce strong results because it has an exceptional CEO, a few rainmaker salespeople or years of institutional knowledge concentrated in a handful of employees. That can certainly drive performance, but it doesn’t necessarily create a scalable business.
Building sustainable enterprise value means turning what works into organizational capabilities that can be repeated, measured and scaled. That requires operating discipline, clear accountability, the right talent, effective processes and increasingly strong underlying data. KPMG goes considerably deeper into the role data, predictive analytics and outside-in intelligence can play in creating that repeatable advantage. [3] We’ll explore more of that later in the series.
Creating value isn’t enough. You have to prove it.
Evidence may be one of the most important themes running through all of this research. It matters throughout the ownership period because management needs to know which initiatives are working, what impact they are producing and where intervention is required. At exit, that evidence becomes part of the story being told.
EY found that 60% of General Partners still identify developing robust data and KPIs as a major challenge in exit preparation. Its research emphasizes a clear, data-backed equity story and management’s ability to demonstrate both what has been accomplished and why the business is positioned to continue creating value. [4]
I also think the definition of evidence itself is changing. What constituted credible evidence even a year ago may not be enough today, particularly around AI. Saying a company has an AI strategy, has invested in tools or is running pilots is very different from demonstrating where AI is embedded in the business, how it is being used and what measurable impact it is having on productivity, growth or profitability.
The same principle applies more broadly. If value creation is increasingly responsible for generating the investment return, investors and buyers need to be able to see it in the performance of the business. There is a lot more to unpack here, and we’ll come back to evidence later in the series.
Value creation spans the entire lifecycle.
Put all of this together and value creation starts to look less like a post-acquisition initiative and more like a discipline that spans the entire investment lifecycle.
If you are buying, diligence should identify not only where value can be created, but what the organization will need to be capable of doing to execute the investment thesis. The planning can’t wait until after close if execution is expected to begin on Day 1.
If you are building, the value creation plan has to translate into priorities, capabilities, resources, ownership and measurable execution. The same applies to founder led companies preparing for their next stage of growth or an eventual transaction. Building a scalable, repeatable business creates value long before a buyer arrives.
If you are selling, you need to demonstrate what value was created, prove it with data, prepare management to tell the story and show that the business has both the capability and opportunity to continue creating value for its next owner.
As I’ve worked through the research, I keep coming back to four basic questions:
Those are straightforward questions, but there is a lot behind each one. Over the next several weeks, the F3 Growth team and I will dig deeper into the research from Bain, A&M, KPMG, EY and others and explore what it means in practice for investors, founders and portfolio company leaders.
We’ll start with Bain and the new return math behind “12 is the new 5,” and what that means for the business expected to deliver it.
Whether you’re buying, building or selling, the underlying question is the same: does the organization have the capabilities required to execute the strategy and create enterprise value?
Sources:
[1] Bain & Company: Global Private Equity Report 2026 | Bain & Company
[2] Alvarez & Marsal: North America Value Creation in Private Equity Report – 2026 | Alvarez & Marsal | Management Consulting | Professional Services
[3] KPMG: Value Creation in Private Equity
[4] EY: EY Global Private Equity Exit Readiness Study 2026 | EY – Global
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