The Rise of Operational Value Creation in Private Equity
Traditional financial engineering is no longer enough to generate competitive returns in private equity (PE). So what is? Enter operational value creation: improving portfolio company operations to achieve sustainable growth. This shift reflects a deeper integration of operational insights into PE strategy and a broader focus on strengthening the core of portfolio companies. PE firms must source investment upfront while sourcing leaders adept in operational transformations behind the scenes. Here’s what we’re seeing.
Operational excellence is ROI
In the early days of PE, value creation focused largely on financial engineering — capital restructuring, cost reductions, and strategic exits. These tactics remain essential, but the demands of 2025’s market — characterized by high inflation, geopolitical tensions, and escalating consumer expectations — will require more hands-on leadership that can adapt on the fly.
Operational value creation goes beyond surface-level adjustments to focus on sustained, transformative growth. This requires leaders who understand not only finance but also the granular aspects of the business, from supply chain optimization to workforce management and customer engagement. Operational value creation has emerged as a central focus for PE firms. Here’s why:
- Increased competition: With more players entering the PE market, generating standout returns requires a differentiated strategy. Operational improvements offer unique value that can set one firm apart from another.
- Longer hold periods: Longer investment horizons call for sustainable improvements, necessitating a shift toward long-term operational enhancements rather than short-term financial gains.
- Higher investor expectations: Today’s investors demand transparency and consistent value creation. Operational excellence offers a more predictable and measurable path to achieving these expectations.
Operational value creation priorities
1. Revenue growth and customer experience
Revenue enhancement isn’t just about increasing prices or expanding markets. Effective operational leaders look to improve every touchpoint in the customer journey. By focusing on customer experience (CX), companies can enhance loyalty, drive growth, and increase profitability. Actions such as leveraging advanced CRM tools and AI-driven analytics enable portfolio companies to track and respond to customer needs in real time, fostering greater brand loyalty and driving up revenue. Revenue growth should be analyzed alongside customer acquisition and retention rates to assess the long-term sustainability of revenue increases.
2. Digital transformation and automation
With digital transformation being a key lever of operational value, leaders must be able to evaluate and implement technology that enhances productivity without overwhelming existing systems. This includes investing in tools for automation, data analytics, and machine learning that streamline operations, cut costs, and improve decision-making. These efforts go beyond merely adopting the latest technologies. The most effective operational leaders know how to harmonize digital tools with existing processes, ensuring a smooth integration that drives genuine efficiency gains.
3. Supply chain and procurement optimization
Operational value creation often lies in identifying inefficiencies within the supply chain. By strategically sourcing materials, negotiating better terms with suppliers, and enhancing logistics, PE-backed companies can reduce costs and improve product quality. In a global market — addled by the increasing turbulence of geopolitical tensions and vulnerable to disruptions — a well-optimized supply chain is a competitive advantage. Metrics such as cycle time, cost per unit, and inventory turnover provide a snapshot of a company’s operational health and reveal areas for improvement.
Sourcing leaders for operational value creation
The shift toward operational value creation calls for some changes in executive placement. After all, identifying and attracting leaders who can execute on these new operational priorities doesn’t happen by accident. You need a highly active and targeted recruiting process. Here’s what we look for:
- Technical expertise in operations: Leaders with a background in finance alone may lack the practical knowledge needed to make nuanced decisions in operations. PE firms increasingly prioritize candidates with experience in operational roles, such as logistics, production, and technology.
- Change management skills: Operational transformations involve shifting entrenched processes, making leaders with change management expertise invaluable. These individuals can anticipate resistance, communicate a clear vision, and guide teams through transitions, ensuring that changes are fully adopted and sustained.
- Data-driven decision-making: The ability to interpret and act on data is crucial for operational leaders. PE firms seek executives who can leverage analytics to pinpoint areas for improvement and measure the impact of changes over time.
- Industry-specific knowledge: Leaders with deep industry knowledge bring an innate understanding of the challenges and opportunities within a specific sector. This familiarity speeds up the time to value, enabling quicker adaptation to PE firm goals.
- Commitment to long-term transformation: Leaders with a history of implementing sustainable operational changes align well with PE firms that prioritize long-term growth over short-term gains. These leaders view transformation as a continuous journey rather than a one-off project.
- Alignment with organizational culture: Successful operational leaders understand the culture of both the PE firm and the portfolio company, bridging the two to foster cohesive and productive environments.
Future of operational value creation in private equity
As operational value creation cements its place within PE, firms are refining their approaches to attract and retain the talent necessary for this strategy. With the right leaders in place, firms can enhance profitability and build resilient portfolio companies equipped to navigate market changes. To meet this challenge, PE firms should embrace a talent-centric model, emphasizing ongoing training and development, fostering a culture of continuous improvement, and measuring progress through clear, operationally relevant KPIs.
The future of PE is operational. Firms seeking to stand out in a crowded market must prioritize operational value creation and invest in leaders who can implement and sustain these improvements.
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