Four years ago, BCG identified a shift in the private-equity industry away from leverage and toward operational improvement as the primary source of value creation. (See The Advantage of Persistence: How the Best Private-Equity Firms “Beat the Fade,” BCG report, February 2008.) Since then, private-equity firms have been experimenting with a variety of operating models in order to increase their capacity to create value by improving the operations of their portfolio companies.
So far, their efforts have been extraordinarily successful. We recently analyzed the operational performance of 89 U.S. and European private-equity deals that were closed between 1998 and 2008 and exited between 2005 and 2011. This sample represents all deals with a minimum enterprise value of €500 million (approximately $670 million) at exit and for which data were available from entry to exit. We found that more than two-thirds of these deals (70 percent) generated an absolute increase in annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of at least 20 percent—and nearly half the deals generated annual EBITDA growth of 50 percent or more.