Hands-on value creation is emerging as the key differentiator in private equity, especially in the mid-market, says Lorna Robertson, Head of Funds
Private equity continues to offer a compelling proposition for long-term investors, even in an environment marked by higher interest rates, sticky inflation, and reduced exit activity. However, the traditional playbook, driven by leverage and rising valuations, is no longer capable of delivering outperformance, with interest rates gnawing away at returns. Today, the most successful private equity managers are those who take an active, hands-on approach to value creation and can transform the companies they invest in.
The exit bottleneck in private equity
Private equity has long been a cornerstone of sophisticated portfolios, prized for its potential to outperform public markets over time. Yet, as the macroeconomic landscape shifts, investors are taking a closer look at how and where returns are generated.
According to Goldman Sachs, private equity distributions as a proportion of fund net asset value (NAV) fell to just 9% in the first half of 2024, down from 29% in 2021.¹ This “distribution drought” has made it harder for many buyout funds to return capital to investors, raising questions about the sustainability of strategies that relied heavily on financial engineering and easy exits. Investors are becoming more selective, avoiding undifferentiated buyout funds, particularly those that may have overpaid for assets and are now struggling to realise value.
Today’s higher cost of capital has left many private equity firms holding onto assets longer than anticipated. Bain & Company estimates that more than $3.6 trillion of corporate assets globally are held on private equity balance sheets, awaiting the right conditions for exit.²
Turning dislocation into opportunity: operational expertise, the new alpha
The mid-market segment across Europe is increasingly shaped by structural and generational pressures, creating compelling opportunities for active private equity ownership. Many businesses are navigating transitions such as succession planning, corporate restructuring, or strategic realignment — dynamics amplified by macroeconomic headwinds including inflation, supply chain disruption and elevated energy and financing costs.
Around 30% of European SMEs are family-owned, with a significant proportion facing succession issues as owners approach retirement. At the same time, larger corporates are driving an active market for carve-outs, which accounted for roughly one-fifth of European PE deals last year.³
Market dislocation often brings mispricing, and companies exhibiting operational or organisational inefficiencies present attractive acquisition opportunities for specialist private equity managers. In this environment, high-quality businesses can often be acquired at discounts to market benchmarks, particularly through situations such as corporate carve-outs, founder successions, or lender-forced sales.
Private equity managers with the skills and resources to drive hands-on transformation are particularly well-positioned. They can acquire high-potential businesses at attractive valuations and implement focused improvement strategies to unlock value over time. With multiple expansion off the table, operational improvement has become the primary driver of returns. Managers that succeed are those who combine pragmatic tools such as buy-and-build consolidation, professionalising management teams, international expansion, digitisation, and targeted margin optimisation.
Our own data reinforces this point. Connection Capital’s proprietary analysis of over 200 businesses across more than 170 private equity sponsors between FY2020–22 found that companies owned by specialist managers achieved significantly higher EBITDA growth than those owned by generalists. The effect was even more pronounced in the mid-market, where specialist managers outperformed larger firms, offering both stronger upside and lower downside risk.4
This approach is resource-intensive, operationally demanding, and requires deep expertise, in-house operational teams, deep sector knowledge, and close collaboration with management. But it is increasingly seen as the most reliable way to drive value in today’s market.
What this means for investors
For investors, the message is clear: success in private equity now depends less on financial structuring and more on actively building stronger, more resilient businesses. Private equity strategies grounded in operational value creation are better suited to today’s more challenging environment. In a market where exits are harder to achieve, operational value creation is not only a way of protecting downside risk but also of positioning portfolio companies for superior potential returns when market conditions improve.
The European mid-market offers particularly rich ground for this style of investing. Nearly 40% of family-owned businesses anticipate a leadership or ownership transition within the next decade, yet only about a third have a formal succession plan in place.5 At the same time, Europe is home to more than 25 million SMEs — representing 99% of private companies — but only around 21% of private equity capital is currently directed at this segment.6 This combination of motivated sellers, succession-led opportunities, and under-invested scale creates fertile ground for managers with the operational expertise to step in, strengthen businesses, and turn today’s challenges into tomorrow’s returns.
Important note
The type of investments offered by Connection Capital for self-selection by its professional clients are high risk and speculative. Investing places investors’ capital at risk and they could lose all of your money. There is no guarantee of investment return or distributions and past performance is not a reliable indicator of future results. The investments are illiquid and are not readily realisable or easily transferable until the exit point.
Sources
- Goldman Sachs, 2024.
- Bain & Company, 2024.
- European Family Businesses/KPMG, European Family Business Barometer 2023; European Commission, SME Performance Review 2023; PitchBook, 2024 European Private Equity Breakdown.
- Proprietary analysis of EBITDA CAGR distribution profiles across 200+ businesses, FY20–22.
- European Family Businesses & KPMG, European Family Business Barometer 2023; European Commission, SME Performance Review 2023.
- European Commission, Annual Report on European SMEs 2023/24; Mordor Intelligence, Europe Private Equity Market Report 2024.