September 15, 2026
For most of the last cycle, a competent sponsor could earn a strong return without the underlying business changing very much. Cheap debt, rising entry-to-exit multiples and a benign rate environment did a large share of the work, and the operating improvement, while real, was often the smaller contributor. That arrangement has ended, and the arithmetic of the new environment is unusually blunt. Bain's 2026 Global Private Equity Report puts it as "12 is the new 5": a deal that once needed roughly 5% annual EBITDA growth to reach the benchmark 2.5x return over five years now needs closer to 12%, because the tailwinds that used to supply the rest are no longer there.
When leverage and multiple expansion stop contributing, the return has to be built inside the business, through revenue growth and margin, and Bain's 2026 work is explicit that operational improvement has displaced financial engineering as the primary driver of returns. Simon-Kucher's 2025 value creation study points the same way from the practitioner side, with operating improvement now the most heavily weighted lever among deal teams and operating partners, named almost twice as often as buy-and-build, its nearest rival. The industry is not debating whether operational value creation matters. It is discovering how demanding it is to deliver at the level the maths now requires.
Delivering 12% annual EBITDA growth is not a financing decision or a board-level ambition. It is a sequence of operational choices executed inside the company, quarter after quarter, and every one of them runs through the people actually running the business. Pricing has to be set and held, commercial motion has to improve, cost has to be taken out without breaking the growth engine, and each of those movements has to be measured well enough to know whether it is working. That is management work, and it exposes a truth the old model let sponsors postpone, which is that the operating team is not the vehicle for the thesis. In this environment, it substantially is the thesis.
The pressure is compounded by time. Holding periods have stretched to their longest in decades, sitting close to seven years, which means the team a sponsor backs at entry is now expected to compound performance for far longer than the original plan assumed. A group capable of a strong first two years is no longer sufficient if the business must keep improving into a sixth or seventh, and the difference between a team that plateaus at year three and one that keeps finding the next point of margin is, under the new arithmetic, most of the return.
This changes what diligence on management is for. Assessing whether a chief executive and a finance leader are competent to run the business as it is answers a question that used to be enough. The question that matters now is whether they can keep building it, at pace, across a longer hold and a harder market, and those are not the same assessment. The first is about steady operation. The second is about the capacity to keep generating operating improvement when the easy sources of it are gone, which is a rarer and more specific quality that a conventional reference-led process is not designed to surface.
The reasonable response is to treat the operating team as the central underwriting question rather than a line beneath the model, and to resource it accordingly. If the plan depends on 12% annual EBITDA growth, the sponsor needs conviction that the people in the seats can actually produce it, and where that conviction is absent the honest options are to strengthen the team before the plan is set or to build the value creation plan around the team that genuinely exists. A finance leader who can turn an operating plan into reliable, forward-looking measurement is part of that answer, because a growth target that cannot be tracked cannot be managed, and the levers most likely to deliver are precisely the ones that need the cleanest data to prove they are working.
The end of the multiple-expansion era is usually framed as a problem of returns, and understandably so, because the same result is now much harder to reach. Framed more usefully, it is a shift in what a sponsor is really buying. When the market supplied most of the return, the quality of the management team was one input among several. When the return has to be built by hand, over a longer hold, in a tougher environment, the people building it stop being an input and become the asset. The firms that internalise this will spend more of their attention, and more of their diligence, on the team than on the model, because in the environment the numbers now describe, that is where the return actually lives.
