Operational Alpha: Why Private Equity Returns Now Depend on Operations, Not Leverage

For most of the 2010s, private equity returns were flattered by two tailwinds that required little operational effort: cheap, plentiful leverage and steadily rising valuation multiples. Both have gone. The result is a fundamental shift in where buyout returns now come from — away from financial engineering and toward genuine operational improvement, what the industry increasingly calls "operational alpha."

What changed: the end of cheap leverage and easy multiples

Bain & Company's 2026 Global Private Equity Report captures the shift with a formulation it calls "12 is the new 5." In the 2010s, a typical buyout needed only around 5% annual EBITDA growth to deliver a 2.5x return on invested capital — roughly a 20% IRR — over a five-year hold, with leverage and multiple expansion doing much of the rest. Today, with borrowing costs of 8–9%, more conservative leverage and entry multiples near record highs, Bain calculates that the same deal requires 10–12% annual EBITDA growth to produce the same return. Easy multiple expansion, in Bain's words, is "gone for the foreseeable future."

So what actually drives buyout returns now?

The honest answer is operations — revenue growth and margin improvement, rather than balance-sheet leverage. StepStone, analysing more than 13,000 buyout deals, found that revenue growth and margin expansion together generated roughly three times as much value as multiple expansion. McKinsey's research points the same way: in its analysis, the majority of value creation in successful deals comes from growth and operational initiatives rather than from buying low and selling high on multiples.

The returns premium for operational focus

This is not merely a philosophical preference; it shows up in performance. McKinsey's 2024 study Bridging Private Equity's Value Creation Gap found that general partners who systematically create value through portfolio-company operations achieve internal rates of return two to three percentage points higher, on average, than peers who do not. Across a fund's life, a sustained 2–3 point IRR advantage compounds into a very large difference in realised returns.

Why holding periods have lengthened

Operational value creation takes time, which is part of why holds have stretched. Bain reports that the average holding period at exit has risen to around seven years, up from five to six over 2010–2021, with roughly 40% of portfolio companies now held five years or longer, against 29% in 2019. Longer ownership gives operating teams the runway to execute commercial, pricing, procurement and digital programmes — and, increasingly, to deploy AI across portfolio companies as an EBITDA lever, a theme BCG and others have highlighted.

Alpha is still achievable — but it must be earned.

— McKinsey, Global Private Markets Report 2026

The advisory takeaway

For sponsors and the management teams they back, the implication is clear: the value-creation plan can no longer be an afterthought bolted on after closing. It must be underwritten at entry — a specific, costed thesis for how revenue and margin will grow under ownership — because that growth, not leverage or multiple expansion, is now what produces the return. For owners selling into private equity, the same logic is an opportunity: a business with credible, demonstrable operational upside is worth materially more to a disciplined buyer than one positioned purely on its historical earnings.

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Sources

• Bain & Company — Global Private Equity Report 2026
• McKinsey & Company — Bridging Private Equity's Value Creation Gap (2024)
• McKinsey & Company — Global Private Markets Report 2026
• StepStone — Drivers of Investment Returns
• Boston Consulting Group — value creation in private equity portfolios