The PE Growth Imperative: Why Operational Excellence Is the New Value Creation Engine
“Operational Excellence isn’t built on financial engineering, it’s built on sustainable value creation. When portfolio companies lack operational discipline, no amount of leverage can generate the returns investors expect.”
In 2025, private equity firms are facing unprecedented headwinds with extended hold periods and challenging exit conditions. Operational Excellence has emerged as the primary driver of sustainable returns, contributing 47% of total value creation in top-performing PE investments versus just 25% from financial leverage. This article explores how PE firms can drive superior returns through systematic operational improvements and why those who master this approach will gain decisive competitive advantages in a transforming industry.
The Changing Private Equity Landscape
Private equity firms are facing unprecedented headwinds: sluggish fundraising, extended hold periods, and challenging exit conditions. In this environment, the traditional levers of financial engineering and cost-cutting no longer deliver the outsized returns investors expect.
As we navigate this shifting landscape, one truth stands increasingly clear: Operational Excellence has become the primary driver of sustainable value creation in private equity. The most successful firms now recognise that transforming how portfolio companies operate, not just how they’re financed, is essential for generating competitive returns.
“In private equity’s evolution, financial engineering was the first act. Operational Excellence is the main performance, and those who master it will write the industry’s future.”
Beyond Financial Engineering: The Operational Imperative
The evidence for Operational Excellence as one of, if not the decisive factor in PE success is compelling. Research consistently shows that operational improvements account for approximately 47% of total value creation in top-performing PE investments, significantly outpacing the 25% contribution from financial leverage.
This isn’t merely theoretical. Consider Carlyle Group’s acquisition of AZ-EM, where targeted operational improvements including product portfolio optimisation and aggressive working capital management generated substantial cash flow within the first year and contributed to a remarkable 10x return upon exit.
Similarly, PE-backed companies implementing data analytics for demand forecasting have seen inventory costs drop by 20% while simultaneously increasing sales by 8%. These operational transformations directly impact both the top and bottom lines, creating value that financial engineering alone cannot match.
The Silent Crisis in Operations
Yet despite this evidence, many PE firms continue to underinvest in operational capabilities. As my colleague Giggsy Jayaweera highlighted in his recent article, The Silent Crisis: The Forgotten Art of Operational Excellence, businesses across industries face a “silent crisis” in Operational Excellence, a crisis equally present in the PE sector.
This evolving landscape hasn’t gone unnoticed by industry insiders. Amelia Collingwood-Johnson, a senior consultant at Stanton House’s Private Equity Practice, noted that “PE firms are shifting their focus from financial strategies and deal structuring to prioritising operational excellence as a value driver.” She emphasised that “operational excellence is no longer just a buzzword, it’s a key pillar of lasting value creation.”
The pandemic exposed fundamental weaknesses in operational frameworks, and many organisations have failed to properly rebuild these foundations. Instead, there’s a dangerous misconception that technology investments alone will “fix” operational challenges, when in reality, Operational Excellence requires intentional design and leadership.
“Technology without operational discipline is like adding fuel to a broken engine. You don’t go faster; you just create more spectacular failures.”
This gap represents both a challenge and an opportunity for forward-thinking PE firms. Those that master the art of operational transformation can gain a decisive competitive advantage in sourcing deals, creating value, and achieving successful exits.
Key Components of Operational Excellence in PE
So what does Operational Excellence look like in practice for PE firms? Based on our collective experience working with PE-backed companies, we’ve identified several critical components:
1. Operational Due Diligence as a Competitive Advantage
Leading PE firms now conduct rigorous operational assessments during due diligence, looking beyond financial metrics to identify value creation opportunities. This approach enables them to:
- Uncover operational inefficiencies that can be quickly addressed post-acquisition
- Assess the capabilities of current management teams to execute operational changes
- Develop tailored value creation plans before the deal closes
- Make more informed bidding decisions based on operational upside potential
“Cost-cutting creates the illusion of operational efficiency, but often destroys Operational Excellence. One saves money today; the other creates value tomorrow.”
This operational focus during due diligence provides a clearer picture of a target’s true value and helps PE firms avoid investments where the operational challenges might outweigh the financial opportunity.
2. Talent Strategy and Leadership Development
Building strong leadership teams early in the investment process has emerged as perhaps the most critical factor in successful operational transformations. High-calibre talent is essential for executing growth strategies and driving returns across the portfolio.
The most successful PE firms create a culture of Operational Excellence by establishing clear accountability and shared goals between the PE firm and portfolio company management teams. They implement succession planning to ensure continuity during the investment period and develop employee ownership schemes that align incentives and help portfolio companies attract and retain top talent.
3. Process Optimisation and Cost Reduction
At the core of Operational Excellence is the systematic optimisation of business processes to boost efficiency, reduce waste, and directly impact the bottom line.
Consider that manufacturing portfolio companies implementing lean principles have achieved margin improvements of 12% through waste reduction. Similarly, renegotiating supplier contracts has yielded 15-20% cost reductions in procurement for portfolio companies across industries.
These efficiency gains translate directly into enhanced profit margins, making portfolio companies more appealing to potential buyers at exit.
4. Digital Transformation as a Value Multiplier
Leveraging technology to optimise business processes and enhance customer experiences has become a central component of Operational Excellence in private equity.
Portfolio companies using AI-driven CRM systems have increased customer retention rates by 25% in B2B sectors. Similarly, implementing robotic process automation (RPA) has reduced labour costs by 30-50% in back-office functions.
The key insight here is that digital transformation shouldn’t be pursued for its own sake, but rather as a strategic tool to amplify operational improvements and create sustainable competitive advantages.
From Operational Risk to Value Creation
For forward-thinking PE firms, Operational Excellence transcends traditional risk management to become a powerful value creation engine. By embedding robust governance frameworks and instilling resilience across portfolio companies, these firms manage emerging risks while simultaneously creating competitive advantages.
The most successful PE investors balance risk and reward effectively, using insurance and other tools to mitigate financial impacts while focusing primarily on developing long-term, resilient operational strategies. This approach enables them to turn operational challenges into opportunities for differentiation and value creation.
The 236 Works Approach to PE Operational Excellence
At 236 Works, we’ve developed our Operational Excellence Blueprint specifically to address the unique challenges facing private equity firms and their portfolio companies. Our approach isn’t about quick fixes or generic solutions, it’s about creating a strategic architecture unique to each portfolio company and its journey.
With our deep collective experience in the PE sector, we understand the operational levers that drive value creation within compressed investment timeframes. Our consultants have first-hand knowledge of how PE firms operate and the urgent need for this operational shift.
The evidence from our industry experience shows that structured approaches to Operational Excellence deliver tangible results:
- Portfolio companies achieving 300+ basis point EBITDA improvements through systematic operational interventions
- Working capital optimisation freeing up significant liquidity within the first year post-acquisition
- Operational streamlining and margin expansion directly increasing valuation multiples at exit
- Increasing sales deal velocity by removing barriers that hinder closing deals with better, slicker processes
Conclusion: The Future of PE Operations
The private equity industry stands at an inflection point, with Operational Excellence emerging as the definitive competitive differentiator. As traditional financial engineering approaches yield diminishing returns, PE firms must adapt by developing sophisticated operational capabilities that drive sustainable value creation across their portfolios.
The evidence is clear: firms that excel at operational improvements consistently deliver superior returns, attract better deals, and build stronger relationships with both investors and portfolio company management teams. For forward-thinking PE investors, Operational Excellence represents not merely a strategy but a fundamental philosophy that shapes every aspect of their investment approach.
“The best PE firms don’t just buy companies; they build operational frameworks that transcend their ownership period. This isn’t about quick wins, but about creating excellence that outlasts your investment.”
In today’s challenging market environment, embracing Operational Excellence is no longer optional but essential for long-term success in private equity. The future belongs to those who master the art and science of Operational Excellence, and the time to begin that journey is now.
References
- Growth Equity Interview Guide: “Private Equity Operations” (2025)
- Private Equity International: “Operational Excellence” (2025)
- Gallagher AJG: “Navigating Operational Risk: Challenges and Strategies for Private Equity Firms” (2025)
- Pyxl: “Business Transformation & PE” (2025)
- Jayaweera, G.: “The Silent Crisis: The Forgotten Art of Operational Excellence” (2025)
- LinkedIn: “Maximizing Value in Private Equity Through Operational Excellence” (2025)
- Collingwood-Johnson, A.: “The Rise of Operational Excellence in Private Equity” (2025)
- Development Corporate: “Private Equity Operating Partners” (2025)
- TBM Consulting: “Exit Prep: Don’t Overlook Operations for More Value Creation Opportunities” (2025)
- Centric Consulting: “PE Operational Improvement Guide” (2025)
If your portfolio’s returns increasingly depend on how companies operate rather than how they are financed, Operational Excellence belongs at the centre of your value creation strategy. To discuss how the Operational Excellence Blueprint could strengthen returns across your portfolio, get in touch.