In today’s private equity industry, alpha is built, not bought

For years, much of what the private equity industry called operational improvement was cost cutting dressed up in the language of value creation. The bill for that confusion is now arriving, in the form of a thousand unsold companies and a bid-ask gap that financial engineering cannot close.

For the better part of a decade, generating strong returns in private equity was relatively straightforward. Buy a good business, add leverage, wait for multiples to expand, and sell. The hard work was in finding the deal. Everything after that was largely financial mechanics. That era is over. The firms that have not yet understood that are the ones sitting on assets they cannot exit, at valuations they cannot justify, waiting for a market that is not coming back.

At this year’s Private Capital Symposium at London Business School, practitioners, investors and advisers came together to make the case for what genuine value creation in private equity actually looks like today.

Keynote speaker Alessandro Bonomi, Senior Vice President of London-headquartered private equity firm Investindustrial, made it clear that the hard work has to begin very early on. “You have to scrutinize every single value creation driver from beginning to end,” he said, “and it starts before the investment. That's where real value creation originates, because it stops you from making a mistake.”

12% is the new 5%

A scion of the Italian industrial dynasty that founded the firm in 1990, Alessandro said Investindustrial put operational improvement above financial engineering. Responding to interviewer Alon Avner, Adjunct Professor of Finance at London Business School, he acknowledged the truth in Bain & Co’s observation that “12% is the new 5%,” meaning that firms now need to generate annual EBITDA growth of 12% to deliver 2.5x return over five years, compared to just 5% annual growth in the previous decade.

The firm uses leverage conservatively, typically one or two turns less than its peers, because “you never want to put a great company in a bad position.” Interest rates could change, markets could change, and companies should not be left struggling because of market dynamics that were out of their control, he said.

He was equally clear about how to approach the value creation plan itself. Too many firms, he said, underwrite business plans with too many variables, where everything has to go right simultaneously to generate the return. That complexity is not rigour. It is risk. “We find that simpler models – two, three, four main value drivers –if you can back those and you're confident in executing on them, that tends to generate the best returns,” he said.

Where value actually comes from

Alessandro suggested portfolio companies might need support with M&A, with finding and incentivising the best talent, with professionalising governance and reporting practices and/or with internationalisation. He identified four practical areas where Investindustrial consistently finds value in its portfolio companies:

Global expansion. Many family and founder-owned businesses have world-class products and strong domestic positions but have never had the opportunity to build international networks. Filling that gap is where some of the most significant returns are generated.

Best practices and reporting. Implementing KPIs, standardising processes and embedding sustainability metrics makes businesses more efficient and generates the data needed to manage them professionally.

Talent. Companies are only as good as the people within them. “The best people drive the most value,” Bonomi said simply. Use incentive structures, long-term incentive plans and management equity programmes to attract and retain the right people. Investindustrial works with operational teams, talent-finding teams and experts in their international offices who know their home markets. It worked with founding families and management teams to build trust and joint business plans to create full alignment from day one.

Technology. Alessandro was clear that portfolio companies are becoming AI-enabled rather than AI-disrupted. In engineering, AI accelerates design. In food manufacturing, it guarantees production line availability. In agriculture, sensor networks have delivered reductions of 30% to 50% in water, pesticide and fertiliser usage. “It is not substituting jobs," he said. "It is improving the service, the speed and the quality of the products.”

Critically, he was emphatic that operational improvement did not mean cost-cutting. “You don't want to build a husk of any company,” he said. “It is not where value lies.” With 65% of Investindustrial's exits going to strategic buyers, sophisticated acquirers who scrutinise assets more carefully than ever, the old model of aggressive cost reduction simply no longer holds up.

AI: the mindset challenge

Following on from Bonomi’s keynote, a panel brought together a broader set of perspectives on the value creation challenge. Moderated by Jean-Philippe Verdier, Founding Partner of independent corporate finance advisory firm Verdier & Co., it included Alberto Bettoli, Co-head of Operational Improvement at Investindustrial; Kanishka Bhattacharya, Partner, AI Solutions Practice at Bain & Co. and Adjunct Associate Professor of Management Science and Operations at LBS; as well as Mergermarket’s Executive Editor Lucinda Guthrie and Raya Schrauwen, Sustainability Associate at global investment firm General Atlantic.

The panelists discussed the impact of AI on both PE firms and their portfolio companies, and the difficulties of integrating the technology into firms that have previously failed to upgrade and modernise their technology base. Kanishka noted that many companies, previously doubtful about the advantages, were now “finding their chequebooks” and committing to end-to-end AI-powered transformations.

While most people equate AI with ChatGPT or Co-Pilot, the real value comes from vertically integrated solutions, redesigning entire end-to-end workflows so that AI agents run processes autonomously and humans supervise and guide. Kanishka offered a pointed observation for firms considering the journey: the single biggest predictor of success is the density of technical leaders in the executive team. Where non-technical leaders dominate the boardroom, he said, "progress is remarkably slow".

Software companies are seeing the fastest change while manufacturing and industrials are moving more slowly, waiting for robotics to catch up. “Give it two to three more years,” Kanishka said, “and there will be very interesting conversations in that domain.”

While the panel warned of likely job losses, particularly in white-collar jobs and the finance industry, they said AI could also drive great efficiencies and, in sectors facing demographic challenges, help fill genuine labour gaps. Kanishka added a warning: where acquired companies have historically underinvested in technology, merging them compounds tech debt rather than resolving the problem and that creates difficulty. This needs to be considered during the due diligence checks.

The market reality

The data presented by Lucinda Guthrie gave the room a clear picture of where the industry currently stands. Looking at the overhang of private equity investments from 2020/21, which should be ready for exit now, sponsors are finding it difficult to sell. Lucinda presented Mergermarket statistics showing the median valuation at entry of the “class of 2020/21” was 17.5x EBITDA, compared with a five-year average of 11.6x. This was creating “a bid-ask problem,” she said.

Her team has noticed that the deals being fully exited were the ones where GPs had rolled up their sleeves and created value operationally. Out of 1620 deals done in that period, 1,088 assets remain fully owned by their sponsors today, still unsold. The largest number of exits went to secondary buyouts, closely followed by strategic buyers, and a surprisingly small number were bought through continuation vehicles. Just six had successfully reached IPO. The deals that are actually getting done are the ones where GPs have rolled up their sleeves and created value operationally. Everything else is waiting.

She identified three drivers she is seeing consistently in successful exits: having the right operating partners in place, genuine digitalisation and AI adoption, and the ability to capitalise on macro tailwinds, backing businesses in sectors where the broader market was moving in their favour. “You are thinking about where the macro winds are,” she said, “because the world you sell into will look completely different from the world you bought in.”

She also noted the importance of leaving value on the table for the next investor. Jean-Philippe agreed later: “You need to leave value (for a buyer) as part of the equity story. Maybe you are expanding internationally. You go into one country, so you’ve shown that the business can be internationalised. But another PE firm might be better than you at opening up somewhere else… It’s part of your equity story, but it’s also selling how the next PE will look at its own equity story.”

Sustainability as a value creation tool

Raya Schrauwen offered a pragmatic view of where sustainability creates value. As an active, partnership-oriented investor, General Atlantic does not prescribe sustainability frameworks for its portfolio companies; instead, it identifies the initiatives where the commercial case and the sustainability case align. Supply chain resilience, energy efficiency and business continuity are genuine value drivers that are also sustainability wins. “Everyone cares about value creation,” she said. “If you can show the commercial case, it helps drive the agenda forward.”

Guthrie added that ignoring ESG is not a neutral position, it is an exit risk. A portfolio company with significant ultra-processed food exposure, for example, faces a materially harder sale process today than it would have three years ago.

Buy and build: the dominant strategy

Buy and build transactions rose sharply following the rise in interest rates post-Covid. Lucinda noted that 61% of sponsor-backed acquisitions seen by Mergermarket so far this year were add-ons. According to Mergermarket data, add-ons per new platform entry have grown roughly three-fold since the late 2010s, reaching a ratio of approximately 2.5 per platform entry in 2026. Jean-Philippe agreed that it is a less risky approach, but the operator needs to have the skill set to integrate.

Alberto highlighted that buy and build is one of the core elements of their strategy, but it only works if integration is genuinely executed and synergies are extracted. He pointed to Investindustrial's Omnia Technologies, built through more than 30 acquisitions into a business generating between 700 and 800 million euros in revenue, as an example of disciplined integration: four clean business units, common systems, and a repeatable blueprint capable of onboarding a new acquisition within a quarter.

Speaking to Think later, Jean-Philippe explained that PE firms have been reluctant to draw down limited partners’ cash while not able to distribute money from exits. So rather than deploy funds into new platforms, the best way to spend money is to put their portfolio companies’ cash into building on existing ones.

The message from the Symposium's value creation stream is consistent: the conditions that made financial engineering a viable return strategy are gone. What replaces them is more demanding, more operational, and more dependent on genuine expertise than anything the industry has relied on before. As Jean-Philippe Verdier put it in his closing remark, the next wave of alpha is not simply bought. It is built.