Bridging the Value Creation Gap in Private Equity: Why Operational Excellence Is Now Non-Negotiable

The private equity (PE) landscape is undergoing a seismic shift. For decades, firms could rely on financial leverage, tax optimization, and rising valuations to generate outsized returns. But those days are over. We are in the age of transformation in private equity.

In a world of higher-for-longer interest rates, compressed multiples, and macroeconomic uncertainty, traditional value creation levers are no longer enough. Today, leading PE firms are turning to a more disciplined, operationally focused approach to drive growth and protect returns.

At NeoForm, we’ve been anticipating this shift for years. In this post, we break down key insights from a recent McKinsey report and share how forward-thinking firms are adapting to close the value creation gap.

The New Reality: Why Financial Engineering Isn’t Enough

With interest rates projected to remain elevated through 2024–2026, portfolio companies are facing:

• Higher debt servicing costs, pushing interest coverage ratios toward covenant triggers.
• Valuation mismatches between private and public markets, delaying exits.
• Increased pressure on EBITDA to maintain financial health and avoid recapitalization crises.

In this environment, operational efficiency isn’t just a competitive advantage—it’s a strategic necessity.

Two Core Principles for Transformation in Private Equity Value Creation

McKinsey identifies two foundational principles that top-performing PE firms are using to outperform their peers by 2–3 percentage points in IRR:

1. Invest with Operational Value Creation at the Forefront

It’s no longer enough to conduct financial and strategic due diligence. Firms must also execute operational diligence to:

• Identify margin expansion and organic growth opportunities.
• Develop a detailed value creation plan pre-acquisition.
• Embed operational targets into the portfolio company’s 3–5 year plan.

This proactive approach not only de-risks the investment but also aligns stakeholders—from investment committees to co-investors—around a clear value thesis.

2. Everyone Must Understand and Improve Operations

Successful firms break down silos between deal teams and operating groups. Key practices include:

• Linking talent to value: Placing experienced leaders who can execute transformation.
• Enhanced monitoring: Using real-time KPIs pulled directly from ERP systems.
• Active governance: Frequent touchpoints with portfolio leadership and even appointing Chief Transformation Officers (CTOs) to steer turnarounds.

Rethinking the Operating Model: Consultative vs. Directive Engagement

Not all portfolio companies require the same level of involvement. McKinsey outlines two primary engagement models:

• Consultative Model: Best for stable companies with strong management. The PE firm acts as an advisor.
• Directive Model: Used when the fund drives the strategy—common in turnarounds or complex transformations.

The key is to align the operating model with the fund’s strategy and the specific needs of each asset.

How Leading Firms Are Empowering Their Operating Groups

Gone are the days when operating teams played second fiddle to deal teams. Today, they are:

• Given board seats and hiring authority.
• Involved early in due diligence and underwriting.
• Measured on financial KPIs and operational outcomes.

Some firms are even hiring dedicated Portfolio CTOs—experienced operators who bridge the gap between the PE firm and the portfolio company, often with compensation tied to EBITDA improvement.

Bringing Best-in-Class Capabilities to Portfolio Companies

Top-tier PE firms add value beyond capital by providing:

• Procurement leverage: Pre-negotiated rates and group purchasing power.
• Executive talent access: Deep networks for recruiting C-suite leaders.
• Specialist partnerships: Ties to functional experts in carve-outs, digital transformation, and more.

These resources are especially valuable for mid-market companies that lack in-house expertise.

The Bottom Line: Transformation in Private Equity

The era of easy returns in private equity is over. The firms that thrive in the coming decade will be those that:

• Prioritize operational diligence alongside financial analysis.
• Integrate deal and operating teams from day one.
• Adapt their engagement model to each portfolio company’s needs.
• Empower operating partners with authority and accountability.

🔗 Links for More:

Read the full article on McKinsey website or NeoForm LinkedIn page.

📌 About NeoForm:

At NeoForm Business Partners, we help PE firms and portfolio companies build the operational muscle needed to achieve financial transformation and win in today’s VUCA market. Operational excellence isn’t a nice-to-have—it’s the new core of value creation.

Visit our blog for more insights on private markets.

🔗 Related Readings:

• McKinsey Global Private Markets Report 2025
• Midyear Private Equity Report 2025 by Bain
• The Next Big Arenas of Competition: 18 Super High Growth Sectors Shaping the Future Economy
• Private Equity Market Trends in 2025: A Year of Recovery and Strategic Shifts
• Global M&A Trends 2025: Key Insights from Bain Report

Need tailored solutions? Explore NEO Services or Contact our partners to learn how our expertise can support your value creation strategy.