The Modern Playbook for Value Creation in PE
The days of financial engineering as the primary path to private equity investor alpha are waning, replaced by a more nuanced—and arguably more difficult—approach to value creation. This shift represents more than a tactical adjustment; it's a fundamental reimagining of how private equity shapes the American corporate landscape.
As private equity firms own an ever-larger share of businesses, their evolving approach to value creation is reshaping how companies operate, the rate of technology adoption, and stronger alignment of employee compensation. An industry that was once criticized for its focus on financial engineering is increasingly becoming a driving force for innovation and growth.
Operations First
The modern PE post-acquisition playbook begins not with spreadsheets and leverage calculations, but with something far more basic: cash. In the critical first months after acquisitions, PE firms dive deep into their new portfolio companies' general ledgers, often discovering that what seemed straightforward during due diligence was a carefully curated version of reality. "It’s like you’ve been flying over on a cloudy day," Hunter Peterson, Managing Partner at Skylark Private Equity Partners, notes. "You've only seen what the prior owner wanted you to see. Now you land, and the hard work begins."
After this initial period of discovery and cleaning up cash management practices, the next phase of value creation begins, which is often referred to as “professionalization.” This PE euphemism refers to the sometimes-painful work of transforming operating processes, with the goal of unlocking efficiency gains and performance improvements. Yes, this is when roles and responsibilities throughout the org chart are questioned. It’s warranted for management to fear that excessive cost-cutting and job loss may result in hobbling growth and institutional knowledge. The focus of professionalization, however, is not just to become more productive; it’s also about enhancing competence and competitiveness. Modernizing processes and upskilling staff not only improves margins but also positions the organization to pursue a sustainable growth strategy, whether through acquisitions or organic growth.
A Human-Centric Approach
The human element in all of this should not be overlooked. PE firms have learned—often the hard way—that successful operational initiatives depend heavily on management buy-in. Trust channels are as important to build as financial and KPI dashboards. Adam Miller, Managing Director at CenterGate Capital, explains this means walking a delicate line: advocating for ambitious change while empowering the CEO to lead their team and claim wins, demanding organizational transparency while respecting the chain of command, and installing advanced IT systems that enable predictive analytics, machine learning, and AI while educating the workforce that these tools will enhance rather than replace their judgment and their jobs.
Intriguingly, some PE firms are also experimenting with extending equity ownership to all employees, much like VC-backed startups have practiced for decades. This movement has been championed by industry leaders like KKR's Peter Stavros and represents a further step in alignment of interests. It suggests the recognition that true operational transformation requires buy-in not just from management, but from the entire workforce. As organizations become more data-rich and agile, opportunities for improvement can be identified anywhere by anyone. Therefore, if everyone is incentivized to spot opportunities and improve performance, value creation goals are more likely to be realized.
Technological Edge
Sandeep Swaminathan, Senior Managing Director at Haveli Investments, shares an analogy that captures this technological transformation. He compares the introduction of modern IT systems and AI to the advent of the backhoe in construction. Just as the backhoe rendered armies of workers with picks and shovels obsolete, modern data systems are making traditional management approaches increasingly uncompetitive. The message to PE firms and their portfolio companies is clear: adapt and thrive or risk extinction.
This technological imperative has even begun to reshape how PE firms approach due diligence. Beyond traditional financial and operational assessments, firms now evaluate both the opportunities and threats that AI presents to potential acquisitions. Carl Press, Partner at Thoma Bravo, describes diligence questions that would have seemed absurd a decade ago: Could AI enhance this company's pricing power? Could it threaten their competitive advantage? Could it render their entire business model obsolete? These strategic questions also illuminate the next phase of value creation, which is sustainable growth initiatives. Whether the strategy focuses on organic growth or acquisitive growth through roll-ups and bolt-ons, modernizing the tech stack and upskilling management and staff are now strategic imperatives.
Keeping up
Given these macro trends, private equity firms are structuring themselves to execute these operational improvements. Rene Benedetto, Managing Director at The Carlyle Group, describes how the largest PE firms have assembled sophisticated armies of data scientists and operating partners—a far cry from the lean deal teams of yesteryear. These resources serve as operational SWAT teams, parachuting into portfolio companies to drive change.
Smaller PE firms do not and will not have the scale to support large in-house teams of operational specialists. And, the exorbitant cost of over-staffed teams of outside vendors can also negate the expected ROI of operational transformation projects. PE firms with portfolios of small cap to lower-middle market companies must take a measured approach by cultivating external networks of trusted C-suite executives, management consultants, and IT vendors. These partners can assist their portfolio companies with more cost effective service models while still taking advantage of leading technologies–like data cubes, predictive analytics, and artificial intelligence.
This evolution of the private equity playbook reflects more than the natural maturation of an industry. It represents a recognition that in an era of intense competition and higher valuations, the path to superior returns requires more than financial acumen—it demands the ability to fundamentally transform how businesses operate to generate alpha. Those who master this new playbook will define the next generation of private equity leaders. Those that don't, may find themselves going the way of the pick and shovel.
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NextAccess Authors: Scott Kosch and Valerie VanDerzee
NextAccess is an advisory firm of experienced operators with deep experience running top-performing organizations and delivering exceptional results. We help executive teams and investors build stronger, more valuable companies through a powerful mix of operational expertise, strategic insight, and data-driven solutions.
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